Consumers who think house prices will increase has jumped two per cent in the last month reaching a high of 61 per cent (compared to 62 per cent Nov 2002) with consumer sentiment being reflected in the current rate of house price inflation, which has so far defied the Bank of Englands’ efforts to cool it.
Andy Gray, head of mortgages for Woolwich and Barclays says, “Despite this burst of confidence house price growth should start to slow over the next few months. The price of an average UK property already looks high in relation to average income. Added to this consumer income is also likely to be stretched by the additional impact of further interest rate hikes and council tax increases which kick in shortly. These factors combined will almost certainly dampen housing market activity.”
Consumer confidence data taken alone suggests that annual house price inflation in 2004 will be similar to 2002 (25 per cent per annum), however there are good reasons why house price inflation is more likely to be in single digits by the end of 2004.
- Historical data from the Woolwich shows that interest rate rises of circa one per cent are needed before consumer confidence is dented. Given that we expect the interest rate rises we have seen so far and those we expect later on this year (May and August) to have a dampening effect on confidence in the coming months.
- The ratio of average house price to average earnings is at a record levels and as such, earnings need some time to catch up otherwise there is a risk homes will become overvalued.
- The ratio of debt repayments to disposable incomes is at a high level.
Andy Gray adds, “People will not be able to afford to put significant upward pressure on house prices and we believe that house price inflation will fall to around zero by the end of next year.”
