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House price forecasts show continued rise
Average UK House prices will grow to be 5 per cent higher at the end of 2010 than at the beginning despite the sluggish start to the year. Average mortgage rates are likely to fall from a current APR of around 4% to about 3% by Q1 2011, say cebr.
This is a key finding from the latest Consumer and Housing prospects report published by the centre for economics and business research (cebr) – one of the country's economics consultancies and respected commentators on the UK housing market.
The forecasts are based on cebr's updated UK economic forecasts released earlier this month. These forecasts show sluggish GDP growth from 2011-14 as the incoming government deals with its fiscal crisis and cuts public spending and puts up taxes.
Because of the sluggish growth, cebr forecasts that base rates will average 0.5% over the next 18 months and will only rise slowly thereafter.
cebr forecasts that average mortgage rates will fall by about 100 basis points by early 2011 as the money markets price in the effects of cuts in the government's budget deficit. cebr considers these cuts likely whoever wins the election and these will have a 'triple whammy' effect on housing mortgage rates.
When the deficit cuts are made, rates will stay lower for longer than is currently predicted, gilts yields will fall and more quantitative easing to offset the sluggish economy will also affect the cost of money. The mortgage rate spread over base rates will narrow as the markets price in interest rates staying lower for longer.
Currently the short run consensus base rate expectation is 2.25% for end 2011 whereas cebr's forecast is 0.5%.
cebr's analysis indicates that base rates could be temporarily higher if there is a hung parliament with a worst case possibility of 3.5% in mid year.
But these effects are expected to be only temporary and within 18 months rates are likely to be back to more or less where they might have been with single party government, after the bond markets force cuts to the budget deficit.
The factors driving up house prices are low mortgage rates keeping housing affordability in as favourable a position as at any time since 2004 and a very low rate of house building. On the other hand, cuts in public sector job numbers and very low wage inflation will limit the scope for house price inflation.
Benjamin Williamson, one of the report's authors and economist at cebr said:
"A lot has happened to affect the housing market in the past three months but the net effects have more or less cancelled each other out. A very cold and snowy winter limited housing activity until well into the spring, an effect exacerbated by the ending of the stamp duty holiday.
"Then, in the budget, stamp duty was reformed, with a zero rate on properties below £250,000 in value for First Time Buyers and a new 5% rate for properties with values over £1 million. Yet we have only marginally revised our forecast from a rise of 6% during 2010 to a rise of 5%."
Douglas McWilliams, chief executive at cebr added:
"Currently the spread between base rates and the APR on average new mortgage offers is to an all time high. One factor behind this is that the APR on new mortgages prices in likely future base rate increases. But we think that the next rate increase (other than a temporary one to protect the pound if there is a hung parliament) could be as much as two years away and possibly more so.
"When the market realises this, the spreads on new mortgage rates will fall."