"It turned out nice again" - but what of 2004

2003 saw asking prices rise by almost 10%, compared with more than 22% in 2002. This was a ‘good’ performance in the context of what many commentators were predicting at the beginning of the year – a year that was marked by conflict in Iraq, consumer uncertainty and the spectre of rising interest rates.

We are still confronted with doom-laden forecasts from a number of quarters – not least from Capital Economics – suggesting that the housing market is a bubble that is set to burst and that house prices will start to slide.

Rightmove: annual house price inflation 2002 – 2004

Does this look like a housing market that is set to collapse?

Throughout the year, we have seen an annual rate of inflation that, having briefly exceeded 25% in January, has declined gradually each month to reach a steady, sustained level of nine-point-something per cent for the past four months.

At present, the market is in the midst of its traditional Christmas shopping-induced respite and won’t see feverish activity till after the New Year sales are over. One thing is certain, however: unless something very unexpected happens, many British consumers will once again be out looking for homes to buy once they have finished snapping up their sales bargains.

After a quarter-point interest rate rise in November, variable mortgage rates have risen but borrowing is still highly affordable and there is an abundance of attractive, low cost fixed and variable rate deals on the market. Lenders still have a huge appetite to lend and even if rates do rise more than once in 2004, most economists expect base rates to be less than 5% by the end of next year.

First time buyers may struggle to afford their first home, especially as prices in many areas have risen substantially over the past couple of years. However, first timers have always had to stretch themselves and the desire to own a property continues unabated. It is also generally accepted that buying works out cheaper than renting.

Rightmove tracks asking prices, and as such acts as an advanced indicator of trends in the housing market. Properties coming onto the market in Q4 2003 will mostly be finalised during Q1 2004, so our data can accurately predict what other indicators will show in the first months of 2004.

Asking prices have risen nationally by about 3.5% over the past quarter, so it is fair to expect a rise in completion prices of between 3% and 4% in the first quarter alone. A forecast for the full year of, say, 4% would imply stagnation for the remaining three quarter of 2004 – in fact a decline in real terms, with RPI edging above the 3% mark.

Forecasts of a ‘stand-still’ seem unduly pessimistic to me, for a variety of reasons.

For one, in addition to an underlying structural shortage of homes (highlighted in Kate Barker’s initial report earlier this month), there is an acute lack of quality residential property for sale at the present time. This is not a major issue at the moment as there are relatively few prospective purchasers actively looking, but it does mean that estate agents will be competing for new instructions after the New Year and, once buyers return to the market, they could be competing to buy what is a scarce resource: both of these factors point to rising prices in the future.

Secondly, as mentioned, the cost of borrowing is and will remain low and unemployment is at historically low levels, meaning that people will be able and willing to commit to property purchase.

Finally, there is no obvious recipe for crash. The 1990s housing market collapse followed a period of feverish activity in the housing market (provoked in part by the actions of chancellor Lawson in abolishing double tax relief), but in 1990 we didn’t see the gradual release of steam that has occurred this year. Back in 1990, mortgage rates went over 15% and the war in the Gulf over Kuwait contributed to a major crisis of confidence. Now, the Iraq conflict seems to be reaching a measured conclusion and mortgage rates, even after the recent rise, are at a third of that level.

I expect further rises in house prices in almost all parts of the country in 2004, but at a more controlled, lower rate than in 2002-3. The place that has fared least well in 2003 – Greater London, and particularly its more expensive boroughs – is seeing a resurgence of confidence: the worst seems to be over in terms of the capital’s housing market.

Rightmove: annual house price inflation 2002 – 2004

The chart above shows where we think annual house price inflation might trend in the first half of next year, with notes on the key factors that might to contribute to the ‘high’ or ‘low’ scenarios. My gut feeling is that 2004 could, once again, see larger price rises than some commentators are forecasting and that price rises approaching, or even in excess of, double figures are quite conceivable.”