Housing and mortgage market outlook for H2 2006

Now that we are past the half way mark of the year and the football and tennis is over, we can get back to chatting about our favourite subject - house prices! Just like the England team, house prices have recently suffered a set back. While looking better than expected than at the beginning of the year, house prices took a tumble in June as mortgage lending fell away by 4% during March and May.

Halifax said that house prices fell by 1.2% in June but, nevertheless, growth was still 4.8% in the first half of the year and an annualised 9.1%. Nationwide reported that the rate of growth in the second quarter fell to 0.9% from 2.2% in the previous quarter producing an annual rate of 4.8%.

England hasn't been so hot with prices growing by 3.6% for the year to June against a national rate of 4.8%, according to Nationwide. But London, which traditionally takes the lead in house prices, has been getting warmer with growth of 4.7% over the past year, the highest rate in England. With surrounding areas also showing higher growth, Nationwide says that the ripple effect is still alive and kicking.

After three and a half years of the south falling behind the north, this trend is now reversed. For the third quarter in a row, the building society (the UK's largest remaining mutual financial organisation) said that house prices in the south have been rising faster than prices in the north. Annual growth for the north is now 1%, while it's 4% in the south. Hometrack's figures echo this and it said that London continues to be a primary driver for growth. It says house prices in London rose by 1.1% in June and 6% annually.

Scotland and Northern Ireland have been the power houses of the country surgng ahead at 10.7% and 24.9% respectively, says Nationwide.

2006 - the housing crash that wasn't

House prices are certainly much stronger than expected by the experts at the beginning of the year. Some lenders were talking about falling house prices for 2006, Hometrack estimated just 1% growth for 2006, Nationwide between 0% and 3%, the Building Societies' Association (BSA) between 2% and 3%; Halifax 3% and Bradford & Bingley 5%. Experts have been talking about a house price slowdown since 2004 / 2005 which didn't really happen.

Although price rises did start to slow in early 2005, they picked up mainly because of low interest rates and a shortage of property on the market.

The outlook for the remainder of the year is now stronger than the earlier estimates suggested. Halifax now reckons on 4.5% growth this year; Norwich Union says that prices may reach double digit figures by the end of the summer and then slow; while a survey by the BSA among building society chief executives expects prices at the year end to be at 4% to 5% higher.

However, property company Savills believes that the house price party is just about over. It expects poor affordability to cause a slowdown and its prediction is for annual growth of around 3.7% over the next five years. In other words anyone looking for a fast buck, will be disappointed. Buying a house is definitely a long term investment.

The biggest threats to the mortgage market are unemployment, low wage growth, debt and affordability, especially among younger buyers. While unemployment has grown along with the number of people joining the market, the number of people in work has also grown - by 272,000 over the past year to June - so that doesn't immediately appear like a potential problem area. Personal debt could be a threat but some people have been switching unsecured lending into secured lending to cut the monthly cost of repaying debt. Higher prices are likely to stretch affordability making it harder for some people to get on the housing ladder or trade up.

However, economists feel that despite high oil prices and the high level of personal debt, the economy is in good shape. Fionnuala Earley, group economist with Nationwide, said, "We were taken by surprise by the strength of the market last year and now expect around 5% growth this year. While interest rates are likely to go up soon and the global economy is not strong, inflation is steady. Over the next three to four years, I expect a stable path with house prices going up at around the same rate as average earnings growth."

Halifax said that substantial increases in utility bills and council tax; and higher fixed interest rate mortgage with an expected rise in interest rates, will curb the market. The arrival of home information packs in June 2007 and the Housing in Multiple Occupation legislation for landlords could encourage people to sell before next year but is likely to further cool the market in 2007.

12 July 2006 © Moneyextra.com

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