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Future's market
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Article
What's in store for the housing and mortgage markets in 2006?
Hindsight is a wonderful thing. With it, we would all have bought property in the late 1990s, and opted for fixed rate mortgages in 2003. In its absence, perhaps the next best thing we can wish for is foresight. And with that in mind, we have invited a selection of experts, comprising some of the country's largest mortgage lenders and brokers, to tell us what they think will happen to house prices and interest rates in 2006. |
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For house price inflation the results are fairly conservative compared to the double-digit growth of recent years. But there is no consensus between our pundits, with some predicting actual house price falls, and others real increases. Purely Mortgages is the most pessimistic, forecasting a fall of four per cent, while Yorkshire Bank takes the sunniest view, anticipating house price rises of seven per cent. Nationwide, on the other hand, sees a completely flat market, with zero per cent inflation for the year. |
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There is greater agreement on interest rates. The experts all predict that the Bank Base Rate will fall this year from its current level of 4.50 per cent.
They are simply divided on whether the decrease will reach 4.25 per cent or 4.0 per cent by 31st December 2006, and in which month the falls will come. All of which should spell good news for borrowers, if the cost of borrowing falls as expected.
Of course, it is important to bear in mind that these are predictions, and that even the experts can get it wrong. As they have shown in the past, there is no such thing as an infallible crystal ball. |
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Nationwide
Bank Base Rate 4.00%
House Price Inflation 0.00%
We do not expect house prices to do anything exciting in 2006, partly because we expect the economy to remain benign, but also because we believe it will take some time for affordability to be restored to more normal levels.
We saw increases in activity in the housing market at the back-end of 2005, prompted by the cut in interest rates in August and an adjustment of house price expectations by sellers. These things have introduced liquidity into the market, and have helped to regenerate some demand, but we think this will be relatively short-lived.
This is partly because affordability remains stretched - especially for first-time buyers, the traditional drivers of the property market. While mortgage payments remain affordable because of lower interest rates, the deposit required to enter the market continues to be prohibitive for many. Other factors that suggest to us that people will remain cautious are overall levels of debt and the realisation that in periods of low inflation it takes much longer for its value to erode.
However, we don't believe that the housing market will enter a period of recession in 2006, primarily because of the strength of the labour market. While people remain in work the main support for the market remains. With record levels of employment and low interest rates, demand is supported, but there is also less likely to be a significant deterioration in arrears and possessions, meaning fewer forced sales and the resulting negative impact on confidence and house prices. |
Philip Williamson, Chief executive, Abbey
Bank Base Rate 4.25%
House Price Inflation 2.00%
Looking ahead, the cut in base rates in August 2005 probably played a part in boosting confidence and affordability that will stretch into 2006. Economic growth is expected to be a little stronger than this year, but probably still below the long-term trend, which is 2.50 per cent.
In these circumstances, the housing market looks most likely to see another year of consolidation, with the monthly pattern of house price changes being variable, as it was in 2005. This in turn will mean that annual house price growth in 2006 is again likely to be in low single digits - maybe around two per cent - with prices looking quite flat, albeit with some fluctuations over the coming year.
There are, of course, always uncertainties about the economic outlook. In 2005, the major 'surprise' was the rapid rise in oil prices that had a major influence on the world and UK economy. There may be similarly unforeseen developments in 2006 that will cause the market to revise its forecasts. |
Barry Naismith, Chief economist, Halifax
Bank Base Rate 4.00%
House Price Inflation 3.00%
The economic fundamentals supporting the housing market remain sound. Continuing economic growth, the high level of employment - which has risen to a record level of 28.76 million despite the slowdown in economic growth over the past year - robust earnings growth, and the prospect of further interest rate cuts are all likely to support a healthy level of housing demand during the coming year.
However, continuing the economic theme which has been very apparent during 2005, house price inflation in 2006 is likely to remain at a relatively flat level. We expect the rate of house price inflation to continue its gentle slowdown in the North this year. The annual rate of house price inflation has slowed significantly in all the regions of the UK over the past 12 months and is now in single figures with the exceptions of Wales and Northern Ireland. The slowdown in house prices outside southern England is expected to continue during 2006, as affordability becomes an increasing issue for more potential homebuyers due to the rapid rises in house prices over the last few years.
The North/South divide will narrow slightly. These increases would result in average house prices in the South being 1.5 times as high as in the North at the end of 2006 compared with 1.6 at the end of 2005. These figures show that the North/South divide has narrowed substantially since a peak of 2.2 in mid-2002. Taking a longer historical perspective, the North/South divide would still be slightly wider than 10 years ago (1.4 in 1996 fourth quarter), but below the 1.7 average over the past 20 years. |
Martin Ellis, Chief economist, Yorkshire Bank
Bank Base Rate 4.25%
House Price Inflation 7.00%
The housing market has stabilised, but those looking for a sharp acceleration in prices could be disappointed in 2006. We look for a modest pick-up in growth over the course of the year, but expect the economy to grow below trend for the second consecutive year, which would give the weakest growth performance for 12 years.
Muted consumption growth will keep inflationary pressures under control and we expect official interest rates to be cut in the late spring as momentum fails to build. We believe that rates will remain at 4.25 per cent for the rest of the year, which still leaves them very modest by historical standards.
We expect house prices to rise by seven per cent in 2006. By recent standards, that will mark a very weak period of growth, especially compared with the 15 per cent annual house price inflation rates seen in 2002 and 2003. We believe that any return to the long-run average annual growth rate of around 11 per cent is unlikely before 2009. |
Gary Lumby, Head of retail services, The Royal Bank of Scotland
Bank Base Rate 4.25%
House Price Inflation 4.00%
A year ago many analysts were forecasting doom as well as gloom. In the event there was no crash. The speed of house price inflation slowed from the breakneck pace of recent years to a flattening through the year, but on the Government's own index it closed the year at around three to four per cent. When you knock general inflation out of the picture house prices, and therefore housing wealth, stayed pretty much stable in 2005.
I remain optimistic that 2006 should see a gradual improvement. There are risks out there, but with real interest rates locked in at much lower levels, people can afford greater debt levels than before. That leaves the main long-term risks being interest rates and the labour market. On the first, we expect a quiet year from the Bank of England and, if anything, an easing of rates in the first part of the year. On the second, we have seen a steady rise in unemployment over the year but from a very low base.
Overall, we expect a slow but sure improvement for the economy over the next couple of years, and there are good reasons to expect that the housing market will reflect this environment. |
Andrew McLaughlin, Group chief economist, Savills
Bank Base Rate 4.00%
House Price inflation 3.00%
With interest rates currently at historically low levels and property inflation now firmly under control, I expect to see a fairly neutral 2006 in terms of both interest rates and house price growth.
We will continue to see regional property hot spots, however. This is always the case, regardless of what's happening in the wider market. The regeneration areas, which include those parts of the East End of London earmarked for development for the Olympics, will remain a good long-term investment. The most generous annual bonuses seen in the City for some years should also filter through to the top end of the market. Property prices in both prime Central London and the prime country house market will perform well, with demand expected to outstrip supply.
I would not be surprised to see a cut in Bank Base Rate in the first quarter of 2006 should the retail figures continue to disappoint.
With inflation under control there appears no reason why a further cut may not be made during the year, taking the Bank Base Rate to four per cent and possibly even lower. Good news for all borrowers in general, and mortgage borrowers in particular, but disappointing news for savers. |
Mark Harris, Managing director , Charcol
Bank Base Rate 3.75%
House Price Inflation 5.50%
To achieve the desired impact, Bank Base Rate nearly always needs more than one movement after a change of direction and so we expect further falls in 2006. The Bank of England has made it clear that it is targeting inflation, not house prices, and the below-par growth in the UK economy will inhibit inflationary pressures.
The major uncertainty on the inflation front is the price of volatile commodities, particularly oil. However, current indications are that inflation will fall from its current level to below the Bank of England's target level of two per cent by the third quarter of 2006. In anticipation of this we expect to see at least two, but probably three, Base Rate cuts in 2006, with the first 0.25 per cent coming in the first quarter.
Interest rates are by far the most important influence in house prices and the cuts we expect in 2006 should stimulate a gentle upward movement in prices as confidence and affordability improve further. Unemployment appears unlikely to be a serious threat to the housing market in 2006.
The ratio of house prices to mortgage payments is far more relevant than the house price to earnings ratio favoured by many economists and by the former measure house prices are not expensive. Furthermore, the impact of the increasing availability of shared equity schemes and no increase in the supply of new property will have a positive impact on prices, albeit a small one. |
Ray Boulger, Senior technical manager, Purely Mortgages
Bank Base Rate 4.00%
House Price Inflation -4.00%
We enter 2006 with rather different growth prospects from previous years. Declining consumer confidence has led to growth stalling and the impact of the current pensions debate and saving shortfalls will further erode this confidence during the early part of this year. Thus the pressure in the UK will remain downward to reinstall consumer confidence and spending. During the course of this year, I expect these pressures will cause Base Rate to drop to a low of 3.75 per cent before recovering in the fourth quarter to four per cent.
In many respects, confidence will be the dominant factor in the housing market this year. If the anticipated further cuts in interest rates occur, they will have the impact of preventing a serious decline in transaction volumes and house prices.
Even with the anticipated decreases, transaction volumes will be down by about 10 per cent on last year. For many years, the evidence has shown that the UK no longer has a homogenous housing market. This contrast will be more marked this year than ever. Properties in high demand and low supply, such as the very high end of the urban market, expensive country properties and waterside properties, will experience a firming of their prices. In areas where property is more commoditised, vendors will experience difficulties in selling without further price reductions. |
Mark Chilton, Managing director, Woolwich
Bank Base Rate 4.75%
House Price Inflation 3.70%
We are confident that the housing market will remain fairly stable throughout 2006, with interest rates broadly reflecting those of 2005. We believe that consumer confidence in the housing market will be sustained and will start to improve towards the second half of the year.
Affordability looks to remain stable, with borrowers spending on average 18.5 per cent of take-home pay on mortgage repayments, as they continue remortgaging to take advantage of lower rates and as interest rates remain low. As a high percentage of customers have taken up fixed rates over the last 12 months we expect this to have a smoothing effect on affordability for the next couple of years. There will, however, still be pressure points, as we saw in 2005, predominantly in the South East and for first-time buyers.
Within the market we expect that there will be an increased focus on remortgaging for buy-to-let investors and also on lenders growing retention strategies.
By the end of 2006 we expect the Bank of England Base Rate to be 4.75 per cent and house price inflation to be 3.70 per cent. |
Andy Gray, Head of mortgages, woolwich
Bank Base Rate
The Bank Base Rate is the interest rate set by the Monetary Policy Committee (MPC) of the Bank of England, which meets each month. Mortgage lenders' standard variable rates (SVRs) are loosely determined by the level of Bank Base Rate, and are usually around 2% higher, though this varies from lender to lender. At the time of going to press, the Bank Base Rate was 4.50%, Halifax SVR was 6.50%, and Nationwide's SVR was 5.89%. |
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