Ray Boulger, senior technical manager of Charcol looks at what is in store for the housing and mortgage market in 2005.
“It is interesting to note that Nationwide and Halifax have different expectations for the housing market next year, although their forecasts actually only vary by 4%. Earlier this week Nationwide predicted house price inflation would be in a range of 0-5%, with their expectation favouring the lower half of this range at 2%. Today Halifax have issued their own prediction for next year that house prices will fall by 2%.
“The one thing that both Halifax and Nationwide agree on is the fact that any decline in house prices will be temporary. Nationwide expect prices to pick up in the latter half of 2005 while Halifax expect prices to pick up in 2006.
“The housing market has certainly softened considerably in the latter half of this year but our estimate is that house price inflation will be around 4% for 2005. However, the relatively small difference in the 3 forecasts compared with the growth in prices over the last few years is fairly immaterial. What is more important is that we all agree on the broad direction of the housing market, namely no crash but a period of relative stability. This will be followed by a return to growth, albeit at a much slower rate than in recent years.
“The key influences on the housing market have consistently been interest rates and the state of the economy. Whilst there are some concerns about the economy, particularly about the level of Government borrowing, unemployment is low and looks likely to remain so for some considerable time. Therefore the risk of borrowers not being able to afford their mortgage payments as a result of being unemployed is small. This means that interest rates are likely to be the major influence on house prices in 2005.
“The housing market is likely to remain soft in the early part of 2005. However, the cost of fixed rate mortgages has already fallen _% from the mid 2004 peak and is still falling. Nationwide expect Base Rate to rise a further 0.25% to 5% but our view is in line with Halifax’s that it has already peaked and will fall to 4.25% by the end of 2005. We do find it a little surprising that Halifax are more bullish than Nationwide about interest rates falling, but are less optimistic about house prices.
“It is important to recognise that it was increased interest rates, and fear of rates rising higher than they did, that caused the rapid loss of confidence in the housing market in mid 2004. Confidence will return when enough people recognise not only that interest rates have peaked, but that 2005 will see lower rates.”