Halifax raises house price forecast to 6%

The UK’s largest mortgage lender, Halifax plc, has revised its forecast for house price growth for 2007 upwards to 6%. Previously at 4%, the revision is said to reflect great upward movement in prices than expected in the first third of 2007. Despite the upward revision, an annual increase of 6% would represent one of the smallest house price rises in a year since 1995, and below the long-term average for price rises of 8% since 1983. The strong growth in house prices has been largely driven by greater economic momentum combined with more acute housing supply shortages than predicted. Recently released figures seem to indicate that house price inflation is slowing as prices increased by under 0.5% for the second successive month in June. Overall, prices increased by 2.0% in the second quarter of 2007, which was less than the 3.0% increase in the first quarter, and well below the 4.2% rise in the last three months of 2006.  This has caused the annual rate of house price growth to ease slightly from 11.1% in March to 10.7% in June.

Underlying housing market fundamentals remain sound. The UK economy is healthy – GDP growth is close to its long-term average pace – and high employment levels will continue to underpin housing market fundamentals during the second half of 2007.

A shortage of both new and old properties for sale will also support house price growth.  Recent projections suggest that the shortfall in new homes being built is worse than previously estimated. The number of new properties needed in England is projected at 223,000 per year over the next twenty years, 63,000 more than the 160,000 homes built in England in 2006. The number of second-hand properties available for sale on the market is also well below the long-term average, and this demonstrates the difficulties many existing homeowners face due to the high costs that accompany a house move. 

Halifax says that pressure on household finances will dampen housing demand. As base interest rates have risen five times in the last twelve months, and mortgage interest rates have followed suit, the increases are affecting housing affordability and are expected to really hit home in the second half of 2007. Real earnings have gone down so far this year, yet inflation has remained above the Government target of 2%, so putting the squeeze on household finances.

Further problems will come when those homeowners who secured cheap fixed-rate deals two years ago are faced with higher payments when they remortgage. Average repayments are expected to go up by at least 10% when they re-fix over the next six months. Halifax expects most of them, however, to absorb the increases as most people’s earnings have increased by 7% in the same period which, without other outgoings should easily cover the increased mortgage repayments.

Different regions are experiencing different house price growth, and Halifax expect this to continue. Northern Ireland should have the highest growth at 23%, followed by Greater London (12%) and Scotland (10%). These figures are based on year-to-date growth and the expectation of slower growth in the second half of the year. Despite growth in Northern Ireland and Scotland the gap between the average price of a home in the south and the north is expected to end 2007 with an increase of £14,500 to a gap of almost £105,000. There was a narrowing of the gap between quarter 1 2003 and quarter 1 2006 of £20,000.

The last twelve months has seen the price of an average home in Northern Ireland increase by 47%, driven by a strong local economy, a high level of immigration and a demand for properties boosted by those buying second homes and properties to rent out from the Republic of Ireland. In Greater London and the South East annual house price inflation has been on the up in the first half of 2007, and Scotland and the North have also seen a rise in price growth. Conversely, all other regions in the UK have seen static house price inflation, or a slowdown.

The Halifax reports that housing assets have grown by 213% in the last ten years, which beats the rise in mortgage debt of 160% quite comfortably. Private housing stock is now worth £3.8 trillion, which is 3.5 times higher than the outstanding mortgage debt of £1.1 trillion. Back in 1997 housing stock was 2.9 times higher than the mortgage debt. In 2006 the value of housing assets increased by £410bn, while mortgage debt went up by £100bn.

Despite rising interest rates the number of arrears and repossessions has stayed fairly low. In 2006, repossessions were 17,000, which is a lower figure than for any year between 1990 and 2000 and a quarter of the total for 1991 of 75,540. Halifax expects a modest rise throughout 2007.

Halifax expects inflation to fall back towards the 2% target set by the Government, and base rates to peak at 6% over the next few months, though they don’t rule out further rises.