I stand by my friendly words of warning: hard times lie ahead
You may remember I predicted that this would be the year the housing boom came to an end. More specifically, I said that in the second half of 2007, as higher interest rates start to bite, prices would fall – perhaps not dramatically, but certainly noticeably. It would mean that, over the year, prices would barely rise at all.
It has been a while since I examined the prospects for UK house prices in detail, so perhaps now is the right time to return to them. Has my forecast held up so far this year?
Well, house-price growth is stronger so far this year than I expected; or, for that matter, than did the Bank of England. The annual rate of house-price growth remains close to 10 per cent, according to Halifax and Nationwide. However, I still believe the final six months will be a lot more hairy. In fact, the headline statistics on house prices are disguising the fact that, in most counties of the UK, values are barely budging at all. Those of you who live outside London and its commuter belt will probably already be well aware of this – despite the punchy numbers produced by economists.
This is because most of these statistics give more weight to expensive houses. So the property spending spree many bankers have embarked on after receiving their annual bonuses has an unduly large impact on the overall UK figures.
The “bonus effect” is not likely to go away soon. My understanding is that the next round of salary awards is likely to be even bigger than this year’s – a series of takeovers is making a lot of banks, lawyers and fund managers a lot of money, after all. So the statistics will remain confusing for a while yet.
But don’t let this fool you. The market is facing an extremely tough period, and you only have to look at interest rates to realise why.
When I wrote my prediction, at the end of last year, it seemed that interest rates were unlikely to go much higher than 5.25 per cent. They have now risen to 5.5 per cent, are likely to rise again to 5.75 per cent – perhaps as soon as next month – and could hit 6 per cent by the end of the year.
You might argue that, while this may be higher than for some time, it is still far shy of the levels hit at the last crunch in the early 1990s. But here’s the rub: the fact that we are now more in debt means smaller increases in rates lift our monthly repayments by more.
In fact, if rates rise to 6 per cent, the debtservicing burden faced by UK households will be equivalent to where it was when we had 11 per cent interest rates, experts have calculated.
And then there are all the other risks: a slump in buyto-let investing; the market mayhem caused by the chaos over the introduction of Home Information Packs; a possible rise in unemployment or a further spike in inflation.
With all this facing homeowners, I continue to believe the second half of the year will not be so rosy.
edmund.con[email protected]graph.co.uk Edmund Conway is Economics Editor of The Daily Telegraph