HBOS economic forecast for 2003

Increasing difficulties for first-time buyers entering the market will constrain demand and this will be the main factor causing a gradual slowdown in house price growth. Higher interest rates will also curb demand, according to the lender.

Consumer confidence should remain strong, supported by continuing low interest rates and high levels of employment with little prospect of a substantial rise in either interest rates or unemployment over the next year. Mortgage payments will also remain low in proportion to earnings. Payments currently represent 15% of gross earnings for a typical new borrower, one of the lowest percentages since 1984 and significantly below the long run average of 22% despite this year’s sharp rise in house prices.

The north/south divide is expected to narrow markedly over the coming 12 months with the current 83% differential between prices in London and the national average predicted to fall to approximately 60% in the final quarter of 2003.

Further house price rises will support an increase in mortgage lending in 2003. High levels of remortgaging and further advances will also buoy activity with gross lending forecast to increase from an estimated £218 billion this year to £235 billion in 2003. Net lending is predicted to rise from £78.5 billion in 2002 to £81 billion next year.

Commenting on the forecast, Martin Ellis, chief economist at HBOS, said: “We expect house price inflation to slow to 9% next year with a narrowing in the north/south divide as prices rise more quickly outside southern England. The difficulties that increasing numbers of first-time buyers are facing in getting a foot on the housing ladder will curb demand causing house price growth to slow. The continuation of low interest rates, low unemployment and the low proportion of earnings taken up by mortgage payments for a new borrower - which currently stands at 15% - will, however, provide a solid foundation for housing demand. As a result, we expect there to be a gradual slowdown in house price inflation rather than anything more dramatic.”