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Last Updated: Wednesday, 29 December, 2004, 06:24 GMT
2004: A tale of two housing markets
By Sarah Toyne
BBC News personal finance reporter

House price inflation, according to Halifax and Nationwide

Just about everyone these days has become a rookie property commentator.

Some would say predicting the future of UK house prices is an unhealthy and over-hyped national armchair sport.

Hardly surprising, though.

For most people - bar the very rich - a home is the biggest asset they are likely to own.

And with house prices more or less doubling over the past five years, it's no wonder homeowners are keen to see if the party will continue.

New year boom

Those property doomsters who had been anticipating the market's demise were in for a shock at the start of the year.

Forecasters had predicted healthy - but not sensational growth.

In the South West it is 62% harder to buy a home than it was 10 years ago
In London it is almost 60% (58.6%) harder to become a homeowner than it was 10 years ago
In Wales the market has become steadily more unaffordable since 1996
In the East Midlands repayments as a percentage of income have increased over 37% since 2001
In the East of England sharp price rises in the last five years mean repayments are forecast to be 20.8% of incomes in 2004
Source: Roof magazine

Within a few months, though, they were revising their predictions upwards.

The housing market was, once again, on a roll - and confounding expectations.

Instead of bringing a reprieve for cash-strapped younger buyers, the new year brought a fresh house price nightmare.

Just a few weeks into 2004, and first-time buyers were greeted with the news that the average first home had hit 100,000.

Prices were booming - and not just for starter homes.

Sales of million pound properties across Britain in the first half of 2004 were 61% higher than in the same period in 2003. In London, 1m plus sales were up 76%.

A healthy economy, low unemployment and low interest rates, coupled with the absence of a major "trigger" which could send the economy spiralling downwards kept the market booming, says Saxon Brettell of Cambridge Econometrics.

"The main driver has been stability of the British economy," says Mr Brettell.

"The economy did deliver a better performance than we expected: there was no exchange rate crisis, no interest rate crisis, and no debt problems.

"There has been no trigger to pop the speculative bubble".

Nip and tuck

Concern about the runaway housing market was a major factor in the Bank of England's decision to push up interest rates in November 2003 from 3.5% to 3.75%.

Mortgage approvals

But it was not until the fourth subsequent quarter-point rise later, in August 2004, that increased borrowing costs appeared to filter down and change the attitudes of buyers.

As Britons were escaping one of the wettest summers on record and overheating on foreign beaches, the housing market began showing signs of heat exhaustion back home.

"In the summer, we hit saturation point," says Mr Brettell.

"The market had basically absorbed a phase of ebullience - of people being willing to take the risk of taking on more debt. With interest rates having picked up there was a strong sense of reality coming back into the market."

A raft of figures from July onwards pointed towards a cooling market.

Halifax reported the first monthly fall in house prices since August 2002, and Nationwide the slowest monthly increase for almost three years.

House prices were close to six times average earnings.

Official figures from the Office of the Deputy Prime Minister (ODPM) also showed prices slowing.

The number of people seeking mortgages for house purchase also dropped to the lowest level for two years.

As autumn rolled into winter, data painted a picture of slowing growth.

"2004 is very much a tale of two halves," says Martin Ellis, group economist at Halifax.

"It wasn't really until we got into the second half the year that we saw the market cooling.

"Since then we have seen quite a different market to the beginning of the year. This was a response to interest rates and a change in sentiment."

Year of west

Part of the market stabilising towards the end of the year involved property price rises slowing in the north.

"We have seen a cooler market in the south for some time. That was being compensated for by rises in the north - but we are now seeing similar problems there," says Mr Ellis.

In contrast, prices in western parts of the UK have boomed during 2004.

House price rises by country

Of the 20 towns recording the biggest house price increases, 13 were located in western regions, according to a survey by Halifax estate agents.

"We have had first the south, then the north and now the west. These things tend to go in ripples," says Mr Ellis.

The fortunes of these areas contrasted sharply to southern England - the starting point for the current boom.

According to property website Hometrack, prices have ended the year lower than they began in the capital.

They are almost 12,000 lower on average than when the London market peaked in June, according to Hometrack.

In contrast, the 2004 housing market's star performer was Belshill, close to Glasgow.

Prices increased by 70% on average throughout 2004.

Highest UK house prices rises in 2004
Top 10 towns
Town Average price 2003 Average price 2004 % change 2004
Belshill, Strathclyde 60,988 103,928 70%
Dukinfield, Cheshire 77,807 124,697 60%
Port Talbot, West Glamorgan 64,490 96,846 50%
Saltburn-by-the-Sea, Cleveland 77,452 114,479 48%
Fleetwood, Lancashire 81,797 120,288 47%
Ebbw Vale, Gwent 69,627 100,950 45%
Neath, West Glamorgan 80,184 115,847 44%
Merthyr Tydfil, Mid Glamorgan 68,057 97,978 44%
Oakham, Leicestershire 188,000 270,566 44%
Holyhead, Gwynedd 77,000 110,179 43%

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