Consumer confidence to be dented in 2005

Mark Chilton, chief executive, Purely Mortgages shares his outlook for the housing and mortgage market for 2005:

- Overall increase in House Price Inflation of 3%

- Bank Base Rate to end 2005 at 4.50%

- Halifax SVR to be 6.60% at end of year

“For years I used to sit in January, surrounded by property agents predicting doom and gloom for the market for the forthcoming year. By April they had usually been proved wrong, with the UK residential market showing its usual resilience in times of adversity.

“Next year I think the pattern will be rather different. Although economists tend to focus on affordability, which we all recognise is now becoming strained, the other factor affecting the UK housing market is consumer confidence. I believe this will be severely dented next year, as the full impact of this year’s interest rate increases are felt, alongside news of a much more adverse tax burden in the Budget. I expect these two factors to combine to depress transaction levels in the market for much of the year.

“The outlook for interest rates is less predictable and, to a certain extent, out of the MPC’s control. There’s a good chance that we have already seen the peak in interest rates and an increasing consensus is emerging that the MPC may have over shot with the regular increases in Base Rate seen during 2004.

“Housing transactions have already slowed down and evidence is emerging that consumer spending is now back under control. The MPC is now probably anticipating that any further suppression of consumer demand will be taken care of by increases in the personal tax burden.

“This combined with the uncertain global economic outlook dominated by the massive funding deficit in America and the increase in oil price, will contain pressure on UK interest rates.There remains however, a 10% risk that global matters will lead to a much more significant interest rate rise.

“However if we ignore this risk, and with the housing market seemingly back under control, we fully expect interest rates to be eased slightly over the course of the year. I therefore expect to see a small easing in interest rate policy, with base rate ending the year at 4.50%. The downward adjustment will most likely happen in the third quarter.

“Recent interest cycles have shown lenders widening their margins when rates fall whilst holding the widened margin when rates increase. With the prospect of few further decreases in rates and the impact of their ever declining back books I don’t believe the decrease in Base Rate will be passed on in full and so I project the Halifax SVR will be 6.60% at the end of 2005.

“The impact on house prices is less certain, as a number of the strain factors that were experienced at the beginning of the 1990s are now no longer present. Notably we have far fewer forced sellers, and, although mobility might be restricted, really significant price drops will be very isolated, possibly at the very top end of the market.

“The current gloomy projections over the housing market will continue through into the first quarter of next year, but the reality will be different. The upper end of the market, dominated by London and the South East, will see a slight fall in real values, exacerbated by low transaction volumes. Low volumes mean that homeowners in this market will stay put rather than crystallising losses and the market data will be dominated by forced sellers. Real values will therefore not shift as much as the indicators suggest.

“The national picture will be saved by reasonable growth in warm spots around the rest of the UK with greater transactions in these areas, leading to an overall increase in the Halifax index of 3% for 2005. However prices in certain areas could fall by as much as 15%.

“The mortgage market will be dominated by rate lead remortgaging across the board next year, with housing activity depressed and little demand for equity withdrawal.With the upward pressure on interest rates slackening the 2005 product mix is likely to be dominated by discounted base rate trackers with fee free products and brokers being flavour of the year.

The industry itself will continue to consolidate with a couple of quite large profile casualties, notably in the sub-prime sector, as the twin effects of harsher regulation and increased risk of repossession both rise.

“Normally you can say we’ve seen it all before, I don’t think this applies for 2005.”