Tough year ahead for the housing market

Ian Giles, marketing director of Purely Mortgages, comments:

"2005 will be a difficult year for the housing market. Affordability has been strained for a while and consumer confidence is falling as the full impact of interest rate rises and tax burden increases are felt. We expect these two factors to combine to depress transaction levels for much of the year.

"The impact on prices is less certain. We have far fewer forced sellers than in the early 1990s and so really significant price drops will be very isolated. London and the South East will continue to underperform, so, whilst on a national basis we anticipate house price increases of about 3%, prices in some areas could fall by 15%.

"The outlook for interest rates is, to a certain extent, out of the MPC’s control! There’s a 90% chance that we have already seen the peak in interest rates. Interest rates will probably ease to about 4.5% by the year end. However, there remains a 10% risk that global matters will lead to a much more significant interest rate rise.

"Our market will be dominated by borrowers switching to reduce their monthly payments, with housing activity depressed and little demand for equity extraction.

"January 2005 will see renewed remortgage activity as people struggle to gain control of their finances post-Christmas. We expect to see lenders launching new rates by the second or third week of January, the first major repricing exercise since before M-Day. "