Housing market on the move
Copyright 2006 The Telegraph
The Telegraph
April 04, 2006
EDMUND CONWAY
Mortgage lenders have indicated that the housing market slowdown may have come to an end, with first-time buyers and buy-to-let landlords starting to return to the market.
However, the prospects for the housing market remain cloudy, with many economists predicting either more price falls or sluggish rises for the coming decades.
Northern Rock said it expected the mortgage market to jump to a record £300bn this year, fuelled by the interest of first-time buyers. Mortgage lender Paragon said the outlook for buy-to-let landlords was also improving, with rental yields increasing and property values rising again.
The news followed a jump in house prices during March, as recorded by Nationwide. It said property values rose by 1.1pc last month, in spite of economists' predictions of a slight fall. This leaves the annual rate of house price inflation at a 10-month high of 5.3pc, having fallen to barely 2pc a few months ago.
Economists said the pick-up is largely a consequence of the Bank of England's quarter percentage point cut in interest rates last August, but warned that it is unlikely that house price inflation will rise to anything like the 25pc seen in 2003.
According to Halifax's chief economist, Martin Ellis, prices are unlikely to exceed wage inflation (currently 3.5pc) for the next 10-20 years. He claimed that higher household bills will make it harder for indebted households to pay their mortgage costs.
Debt levels themselves are nevertheless still rising. Recent Bank of England figures showed that, having fallen considerably, mortgage approvals have also bounced back since the end of last year, as have levels of secured debt.
However, economists said it is not clear how much of this represents actual transactions, and how much of it is people extending their mortgages in order to pay off credit-card bills.
The orthodox school of thought espoused by Mr Ellis, and indeed most City economists, is that house prices are still unaffordable for first-time buyers.
They argue that either house prices must crash or they must rise at a much slower rate for a number of years, until they are no longer out-of-reach.
But another theory was recently suggested in a paper by Oxford economists Gavin Cameron, John Muellbauer and Anthony Murphy. They claimed house prices are sustainable at current levels, saying low interest rates, high incomes and high population growth explained the increase.
The flaw that most economists have found with this theory revolves around the absolute levels of household debt. While most people are still able to pay off their mortgages relatively easily, this would change if interest rates rose suddenly.
But this is unlikely to be caused by domestic circumstances, since the Monetary Policy Committee's credibility has helped anchor people's expectations for inflation.
However, a severe oil price shock, of the kind which might be thrown up if there is a major conflict between Iran and the US, could be enough to send inflation - and hence interest rates - soaring.
This would obviously have disastrous effects for the UK housing market and is another illustration that there is no longer such a thing as a purely domestic economy.
You can email me at Gavin.Cameron@economics.ox.ac.uk
Last updated: 31 July 2006.
