Country houses for sale

House prices in 2008

What is going to happen to house prices in Britain over the next twelve months? As a nation obsessed with house prices and the weather ? surely two of the most stubbornly unpredictable things there can be ? we continue to wonder about both on a daily basis. And for many it finally seems that, along with the chilly winds and dark evenings which mark the onset of winter come some equally chilly prospects for the housing market.

As headlines continue to feature the credit crunch in the UK, the effects of the sub prime crisis in the US, and gloomy prospects for the big banks, it seems a worthwhile project to try and separate the dramatic headlines in the press from what is actually happening in the property market.

Overvaluation, as discussed in the latest IMF report, is certainly an issue in the UK. House prices have risen by unprecedented levels over the past decade (prices trebled between 1995 and 2005) fuelled by a buoyant economy, low unemployment, banks offering very generous mortgages, and that old favourite supply and demand.

The property market inevitably follows the economy in cycles, and it is worth going back in time a bit to see at what point we might now be in such a cycle. Going back to 2003 – the so-called year of the north, when prices rose 8% in London and 30% in the north ? prices had been rising by at least 1% every month for the past 18 months. Going into 2004 we saw further protracted growth and a slightly incredulous press again insisting such a state of affairs couldn’t last. By the end of the year inflation had eased to 12.7%, down from 14%, 25% and 16% year-on-year growth in 2001, 2002 and 2003 respectively, but could hardly have said to have crashed.

2005 saw a further slowing of growth, and when prices rose sharply throughout 2006, and the Bank of England responded in kind by rising interest rates, many thought the beginning of 2007 would see a calm property market as things cooled off. However, the delayed effect of the rate rises, continued lack of supply and demand, lenders offering over 125% mortgages and most of all, consumer confidence that prices would continue as they had been for the foreseeable future meant that the market continued to outperform beyond anybody’s expectations for the first half of the year. In the second half of the year the planned introduction of HIPs meant people were keen to sell before the August introduction date; indeed the market cooled in August, as interest rate rises and affordability issues began to really take over, as one would expect.

Now, in November, we are in a situation where house prices are higher than they should be, but it should not be forgotten that this is also still due to low unemployment and a strong economy, with people perfectly prepared to spend more of their spare cash on a mortgage than they have before. But the dreaded credit crunch is upon us, and finally, after months of people warning the property market was going to crash we see a market which has cooled, and prices which are no longer rising exponentially. Those that look to the crisis in the US predict hellfire, but sensibly what we seem to be looking towards is a long overdue period of stability and realism wheras previously lending at the rates people were offered was unsustainable.

Banks and building societies are always keen to get first time buyers onto the property ladder as they support the rest of the market, but tempting them to make that leap with mortgages which, when reviewed after two years of price growth, will become impossible to pay is no way to keep the rest of the market healthy. First time buyers should, and will in time, hopefully be able to take advantage of the fact that smaller houses will be easier to buy, and that will kickstart things again, which is the way the cycle operates.

For now however, although lenders will not offer oodles of cash to those who are at risk of not paying back, they are not going to stop giving mortgages to those whose credit is good, at realistic rates of repayment, in the expectation that they will still make money out of borrowing. Most companies who produce house price indices expect a couple of years of 0% growth at the worst, and after appreciation seen on the scale many have witnessed in the past ten years ? growth of 60% easily in some areas ? this is hardly the end of the world.

Those who still forsee the appearance the four horsemen of the property apocalypse over the horizon will continue to do so, but its worth remembering if you are thinking about buying or selling at the moment, or indeed next year, that the most important factor in all this is the confidence of those who are involved. Realistic pricing and expectations will ensure the market will remain strong where demand is strong, and may dip slightly in other more volatile areas, but as long as nobody panics prices will not crash. And ‘House prices will not crash’ doesn’t sell newspapers, which is no terrible thing, as long as you’re not paying your mortgage courtesy of a daily rag, of course?