House prices approach ‘tipping point’
Asking prices for UK homes took a 1.3 per cent leap in November, according to the latest Asking Price Index report from Home.co.uk. This means that nationally, average house prices have increased for three successive months - a sure sign that sellers’ confidence is growing.
A rally in asking prices signals an uplift in market sentiment and a new upward trend. But, says Home.co.uk, the timing could not be worse.
These asking price rises come in the wake of August’s interest rate hike by the Bank of England suggesting this initial inflation-fighting measure was unable to tame inflationary pressures faced by the economy, according to the report. Earlier this month, the Bank raised rates again. Asks the report: ‘Will this second hike have the desired gentle braking effect on the runaway train that is the UK property market or will it stop dead in its tracks?’
Home.co.uk’s view is that ‘the combination of rising asking prices and interest rates is taking the UK property market into dangerous territory’. In the first quarter of 2005, the report points out, high asking prices caused the number of monthly transactions to drop, causing a market ‘wobble’.
‘The market looks set to wobble again. Increases in the cost of borrowing coupled with rising asking prices are likely to slash transaction volumes and drive the market toward a “tipping point”.
If the housing market retains some fluidity, the short-term outlook for first time buyers is bleak,’ the report concludes.
Doug Shephard, director of Home.co.uk, says, ‘Since 2004 we had observed a slow downward trend in house prices - it looked as though the affordability gap for first-time buyers was closing as the “froth” melted away. Over the last six months, the opposite trend has emerged. With sellers’ confidence in the market on the rise and increasing interest rates, the affordability gap for first-time buyers is rapidly widening.’
No cooldown for market
The housing market is showing no signs of cooling down as we head into the winter months, according to Assetz. The company’s index of the six major price indices shows that the continuing price rises are driven primarily by the continued imbalance between supply and demand, as opposed to interest rates.
Assetz stands by its original prediction of seven per cent annual house price inflation by the end of 2006, with eight to 10 per cent growth for 2007 and 2008, allowing for an additional interest rate rise in January.
The Bank’s decision to raise interest rates this month to five per cent to combat inflationary fears could in fact help deliver inflation, claims Assetz, by driving demands for higher wages through perceptions of an increased cost of living. House price growth is driven almost entirely today by the growing need for new homes, it says, a result of the government’s immigration policy and the huge rise in single-person households, along with severe planning restrictions which prevent housebuilders from responding to demand.
Stuart Law, managing director of Assetz, explains: ‘The Bank of England is perhaps looking too closely at house price rises as part of the inflationary mix, still believing rises to be interest-rate led. In fact, the growing demand for homes, driven by high immigration and the forthcoming expansion of the EU to include such countries as Bulgaria, Poland and Romania, will be the main source of house price growth over the next few years, rather than low interest rates which primarily drove price rises up until 2005.’