Housing market - boom or bust?

Prices rose steadily across the country in 2000

With conflicting signs all around, Dharshini David examines what really happened in the UK housing market over the past year.

Are we set for a year of rising prices - or have the good times finally come to an end?

The value of our homes is always a popular topic, but anyone looking at the latest house price numbers may have been confused.

According to the Nationwide building society, the value of the average home rose by more than 9% in the year to December - equivalent to about £20 per night.

But alternative numbers from the Halifax claim a rise of just 3%, the weakest rate for five years.

Consistent trend

These two key measures of house prices do tend to differ. And the Halifax admits that its weak December figures may just be a blip.

But it is not just the very latest numbers that have been confusing. Over the last year, the strength of the housing market has been difficult to judge from one month to the next.

However, in retrospect, the evidence from the main housing commentators such as the Halifax, Nationwide and Royal Institute of Chartered surveyors throw up a consistent story.

For the time being, a housing market slump appears to have been sucessfully averted.

Most commentators started 2000 on an optimistic note, arguing that low unemployment and incomes would mean a buoyant property market, with house price inflation perhaps ending the year in double digits.

And certainly, at first that seemed to be the case.

According to the Halifax, house price inflation hit a ten-year high of 16% in January, with London and the South-east leading the way.

But by the summer, house price inflation had started to slow. Although prices were still rising in much of the country, they had more or less levelled off in the capital.

There were three probable reasons for this:

• interest rates rose by 1% between September 1999 and February 2000, while mortgage interest relief on mortgage payments was abolished in April. This added about £50 to the monthly payments on a £50,000 variable rate mortgage
• Stamp duty, the tax on buying property, was increased for the most expensive properties. This may have curbed the appetite for buying such homes, which are most likely to be situated in London
• First-time buyers, who tend to be the backbone of the housing market, may have found themselves unable to afford to get on the property ladder.

According to the Nationwide, the average London home was worth £140,000 in the middle of last year.

Assuming they had a deposit worth 10% of this price, a buyer would need to earn over £40,000 - twice average earnings - if they were to get a sufficient mortgage advance worth three times their salary.

These factors are likely to have dampened housing demand - and so inflation.

As a result, many forecasters warned of a more dismal outlook for the property market.

But it didn't materialise. Instead, after a correction in some of the property markets overheated hotspots, prices across the country were on their way up again late last year, albeit at a moderate rate.

Affordable option

According to the Nationwide's David Parry "In 2000 we've had much talk of booms and then busts. In reality the market paused for breath mid-year and is now moving ahead at a steady sustainable pace."

And the experts think this is likely to continue.

Consumer confidence remains robust, incomes are rising and unemployment is close to a twenty year low - and this means demand for property should remain buoyant.

While it is still difficult to get a foothold on the property ladder, those who have managed to do so are finding homeownership an affordable option.

According to the Nationwide, only a fifth of our gross incomes is spent on monthly mortgage payments, compared to two-fifths just a decade ago.

If, as widely expected, interest rates fall this year, then mortgage bills will shrink further. Meanwhile, first-time buyers are being helped into the market by increasingly generous mortgage offers.

The Nationwide predicts prices will rise by 7% this year, while Halifax looks for a more modest 4%.

For most of us, the value of our homes is unlikely to soar this year.

But for the time being, a housing market slump appears to have been sucessfully averted.