Where are house prices going in 2011?

By at home

After the dip caused by the credit crunch in 2008, the surprise recovery caused by a lack of supply in the summer of 2009 and the easing off in 2010, nobody is quite sure which way house prices are heading in 2011. We look at the factors that can have an impact and find out what the experts think

Everyone, it seems, is obsessed with property prices and whether they’re going up, down or staying put. Following the dizzy heights of 2007, when the cost of an average property in England and Wales hit an all-time high of £182,914, according to Land Registry figures, prices were hit hard in 2008 and, following months of decline, the average home cost just £152,556 in April 2009.

However, much to everyone’s surprise and due to a combination of factors including record low interest rates and a limited supply of houses for sale, it was the property market that seemed determined to lead the country out of recession. The market rallied as well as could be expected, taking into account the uncertain economic conditions, and in August 2010, the average cost of a home stood at £167,423 – almost 10% higher than the low point of 2009. Before you get too excited though, experts are quick to point out that, in the face of difficult conditions, this gain in prices will be shortlived.

To support this view, at the end of September, Hometrack (www.hometrack.co.uk), the residential property information company, revealed that house prices had fallen in every region of England and Wales for the first time since spring 2009. Until then, falls had been registered, but London and the south east seemed immune to what was happening across the rest of the country.

Hometrack said the cost of a home fell by 0.4% in September – the third monthly decline in a row – as interest from buyers waned. Richard Donnell, Hometrack’s director of research, said: ‘It’s part of an ongoing repricing process which began six months ago and is set to stretch well into 2011.’ Exactly what happens to the property market in 2011 depends on a number of things including the general state of the economy. At any time, one or more of the following factors can influence the general direction in which prices are headed.

Exchange rate
It was partly due to the weak pound that property prices, especially in London, shot up during the recession.

Overseas buyers benefitted from a weak pound, getting more house for their money. Sterling has strengthened slightly since 2008, but overseas buyers still get value for money.

Supply and demand
This is regarded as one of the most important factors to influence property prices.

The dip in prices from their 2007 peak was led by a fall in demand, while the recovery in 2009 was led by a heightened demand and a shortage of properties for sale. Homeowners who wanted to sell, but didn’t have to, managed to hold off thereby creating a property shortage. This helped buoy the market and stop prices from going into freefall.

Then, following the abolition in May 2010 of Home Information Packs (HIPs), legislation which involved an outlay of around £400 for sellers just to put their home on the market, there was a rush of sellers – a rise of 35% in the first week alone, according to property listings website Rightmove. This created more competition among sellers, which is said to have put downward pressure on prices.

However, those not selling due to the cost of a HIP have probably worked their way through the system now, so this is no longer expected to be a factor in determining the number of homes marketed for sale. Hometrack said demand and supply of property has been moving in opposite directions – supply on the up and demand down. ‘Over the last six months, the supply of homes for sale has grown by 16% while demand has fallen by 1.6%,’ says Hometrack. The Royal Institution of Chartered Surveyors (RICS, www.rics.org) agrees. A spokesman said: ‘The fresh influx of property to the market combined with a lack of buyers is a key problem.’

Next year, it is expected weaker demand, due to the lack of available finance for mortgages and fears of economic volatility, may make buyers err on the side of caution. However, much depends on which part of the country you focus on. With a growing population in the south east, demand there will naturally be higher.

Mortgage rationing
The availability of mortgages, as well as the high loan-to-value loans, helped to fuel prices in the last decade. Times have changed – dramatically.

Since the credit crunch gripped the UK back in 2008, many lenders have gone bust while others have cut back on the amount of money they will lend, simply because they no longer have access to the vast sums they did before the crash. The result of this tightening has meant that would-be buyers need to put down hefty deposits of up to 25% to secure a loan. If your credit score is low through missed credit card payments and the like, the chances are you won’t even get a look-in.

In 2006, 245,000 approved home loans only needed a buyer to put down a deposit of 10%; in 2009, only 28,000 loans were approved with a 10% deposit. The massive 89% drop in availability of high loan-to-value mortgages is a key reason why first-time buyers can’t get a leg up. And, when you consider that the number of mortgages approved has plunged to less than 50,000 a month, compared to a whopping 135,000 a month before the credit crunch, it doesn’t suggest that things are going to improve drastically any time soon.

In fact, the Bank of England has warned things are set to get worse. Its Credit Conditions Survey reports that lenders have tightened credit scoring criteria over the last six months, and are expected to tighten them again before the year-end. According to new data from the Council of Mortgage Lenders (CML, www.cml.org.uk), gross mortgage lending declined to an estimated £11.4 billion in August 2010, down 14% from £13.3 billion in July 2010 and 6% less than the £12.1 billion figure for August 2009.

This is the lowest August total since 2000 (£11.1 billion). The CML says lending volumes are likely to remain below 2000 levels in coming months as recent activity was boosted by the stamp duty holiday.

Shortage of new housing
While supply and demand continues to be a factor, Britain is also facing a housing shortage due to the reduced numbers of homes being built. A long-term shortage of property lies ahead.

The Home Builders Federation
(www.hbf.co.uk) warns that there is a shortfall of nearly a million homes across the UK. Only 142,000 new properties were built during 2009 – the lowest figure since the 1920s. Property consultant, Drivers Jonas Deloitte (www.djdeloitte.co.uk), warns the acute shortage of family housing could stoke up house prices coming up to 2013. Rob Bruce at property group Jones Lang LaSalle (www.joneslanglasalle.co.uk) agrees, saying: ‘Nothing is being done to address the structural undersupply of new housing in the UK. We require six million additional homes by 2031. By 2013 we can expect house price inflation to accelerate towards double digits, partly fuelled by the structural undersupply of new housing in the UK,’ he says.

Doom merchants tend to view affordability as the main reason why property price increases simply cannot continue as they once did.

The house price-to-income ratio has more than doubled since 1997, meaning that while property prices have rocketed, incomes have not been able to keep pace. ‘Higher taxes, spending cuts and rising unemployment all point to fresh house price falls both this year and next,’ forecasts consultancy Capital Economics (www.capitaleconomics.com).

Capital gains tax
In the Emergency Budget on June 22, it was announced that higher-rate taxpayers would have to pay a capital gains tax of 28% on properties sold, with immediate effect.

Fortunately, as the change came in immediately, there wasn’t a massive rush of people trying to offload their properties by a certain date, which could have caused slight oversupply in the market. Over the longer term, however, it is likely that fewer people who pay the higher rate of tax will consider purchasing property for investment purposes. This could deal another blow to the residential buy-to-let sector, which has already been very hard hit by mortgage rationing.

Interest rates
It goes without saying that current mortgage rates, which are historically low, have undoubtedly stopped people from experiencing severe financial difficulties during the credit crunch.

It was also in part due to the low interest rates that activity and prices started to pick up in the spring of 2009. These low rates have had the added benefit of preventing cash-strapped households from having to sell their properties, as was the case in the recession of the 1990s. This time round, rather than being hit by whopping mortgages due to sky-high rates, property owners have actually been able to save money as a result of their mortgage bills being slashed by falling interest rates. And, of course, which way rates head from here will have a key role in dictating the future of the UK market.

Stamp duty
In his last budget as chancellor, Alistair Darling announced that, with immediate effect, there would be a one-year stamp duty holiday for first-time buyers purchasing properties valued at less than £250,000. He also announced that, from April 2011, a 5% rate of stamp duty would apply to properties worth more than £1m.

Although the tax reprieve seems to have had little effect on the lower end of the market, the delay in bringing in the top rate could encourage buyers of high-end properties to act this year before the rise takes effect, meaning activity at the luxury end of the market could be lower in 2011. 

Gazing into a crystal ball
We asked the experts what they think will happen in 2011. Here’s what they said…

House prices are ‘softening’ in the second half of 2010, according to the Halifax, as its figures show they fell by a record 3.6% in September. Martin Ellis, chief economist at the bank, thinks that house prices in the UK will change little in 2011.

The building society said that while the market was easing, house prices were unlikely to fall as they did in 2008, with the evidence pointing to a period of stagnation. ‘The current period of price declines is likely to remain relatively modest,’ said chief economist, Martin Gahbauer.

Ed Stansfield of consultancy Capital Economics, fears the worst. He said: ‘The renewed downturn in house prices is unlikely to be short-lived. Not only is the market still significantly overvalued on most measures, but the lack of mortgage credit and the weak economic outlook point to prices falling this year and 2011.’ The group expects house prices to fall 5% this year, and 10% in both 2011 and 2012.

Rob Bruce, Head of Residential Research, Jones land Lasalle
‘The longer-term outlook for the UK housing market is more positive with significant growth anticipated by 2012 and pricing gravitating towards the long-term average of 7% per annum,’ says Rob Bruce.

Ray Boulger of mortgage broker, John Charcol
Ray feels prices will change little in the coming 12 months, ending in the region of 2% either side of their current levels. ‘Because the economy is subdued, the Bank of England will keep interest rates low for a while,’ he said.

Howard Archer, Chief economist at IHS Global Insight
Recent price falls are ‘partly a correction to the surprising rises reported in August and July,’ says Howard. ‘Rather than crash, we expect house prices to trend down relatively gradually over the final months of 2010 and in 2011, to lose around 10% in value.’

Pictures: getty images

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