WORDON THESTREET

I stand by my friendly words of warn­ing: hard times lie ahead

The Daily Telegraph - Property - - Cover Story - Ed­mund Con­way

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

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