While a modest economic slowdown, rising bills and higher unemployment levels are likely to curb house price rises, a number of factors look set to make 2006 a seller's market
Looking ahead to the coming year, we expect modest house price growth, with low, single digit, growth likely to be the norm in the UK property market. UK house prices are forecast to rise by 3%, broadly in line with the predicted rise in retail price inflation.
The annual rate of house price inflation is expected to increase during the first half of 2006, potentially reaching a peak of 7%-8% by the middle of the year as modest monthly rises in 2006 compare with broadly flat prices in the first six months of 2005. The annual rate is subsequently expected to fall as prices rise at a markedly slower pace than in the second half of 2005.
The number of property transactions in England and Wales is projected to increase from 1.5 million in 2005 to 1.6 million in 2006 following a 16% fall last year from 2004's figure of 1.8 million.
bills on the rise
Continuing economic growth, the high level of employment, which has risen to a record level of 28.81 million despite the slowdown in economic growth over the past year, along with 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.
Both council tax and utility bills are expected to rise by well above inflation in 2006, causing non-mortgage related housing costs to rise from 66% of total housing costs in 2005 to around 70% in 2006. This increase will more than offset lower mortgage rates.
A number of major power suppliers have already implemented double digit increases for gas and electricity for the coming year, whilst the Local Government Association has warned that council tax bills may need to rise by 10% in April. In addition, the ongoing historically high level of house prices relative to average earnings is expected to curb housing demand.
Average earnings are predicted to rise by 4.5% in 2006. As earnings growth outpaces house price inflation, the ratio of house prices to earnings will ease from a peak of 5.6 in mid 2004 to 5.4 at the end of 2006. This reduction will make it slightly easier for first-time buyers to get onto the housing ladder.
Taking a closer look at a regional level, the annual rate of house price inflation has slowed significantly in all the regions of the UK over the past 12 months. It is now in single figures with the exception of Wales and Northern Ireland. The slowdown in house prices outside southern England is expected to continue during the coming year, as affordability becomes an increasing issue for more potential homebuyers.
We expect to see some signs of modest recovery in the South of England and the Midlands during 2006. House prices, however, remain historically high relative to average earnings throughout these parts of the UK. This is a factor that will continue to curb housing demand and prevent a marked pick-up in prices.
North and South
The North/South divide has narrowed substantially since reaching a peak of 2.2 in mid 2002, and we expect it to continue to narrow in 2006. Average house prices in the South are forecast to be 1.5 times as high as in the North by the end of 2006 - that compares with 1.6 at the end of 2005. Taking a longer historical perspective, the North/South divide would still be slightly wider than 10 years ago (1.4 in the fourth quarter of 1996), but below the average of 1.7 over the past 20 years.
Higher City bonuses than in previous years are expected in the new year, and these will boost demand at the upper end of the London housing market. This, however, represents a very small segment of property market in the capital. The three London boroughs with the highest average prices - City, Westminster and Kensington & Chelsea - account for only 4% of the total owner-occupied housing stock in Greater London.
Buyers have been putting down bigger deposits than in previous cycles. According to the CML, some 81% of all new borrowers took out a mortgage of less than 90% of the house price during the first half of 2005. This was significantly higher than in 1989 and 1990, when 56% of new borrowers took out a mortgage of less than 90% of the house price.
CML figures also show that the numbers of repossessions and cases of mortgage arrears both increased in the first half of 2005. Both, however, remain at extremely low levels by historic standards. For example, the number of properties taken into possession during the second half of 2004 and the first half of 2005 was 7,710 - this was equivalent to just over 10% of the total seen in 1991 (75,540). Nevertheless, in line with the industry we expect a modest rise in arrears and possessions during 2006.
The mortgage market is expected to be broadly stable in 2006 following a modest decline in 2005. Gross lending is predicted to total £290bn next year compared with £284bn in 2005. Net lending is expected to remain around £90bn.
The shape of the mortgage market will be similar. In particular, we expect the proportion of first-time buyers to increase modestly as affordability improves. Remortgage activity, estimated at 45% of gross lending in 2005, is expected to remain close to the same level in 2006.
Overall, the UK housing market is set for a period of broad stability with house prices forecast to rise by 3%, broadly in line with the predicted rise in retail price inflation. Low, single digit, growth is expected to be the norm across most of the country.
economy slows, but not significantly
Looking at the wider picture, the UK economy is forecast to grow by 2.2% in the year ahead. Overall, GDP is estimated to have increased by 1.6% in 2005, with the UK economy expected to record its sixth successive quarter of below long-term average growth in the fourth quarter of 2005. Growth is forecast to pick up next year, but we expect GDP growth, at 2.2%, to remain below the UK's long-term average rate of 2.5%.
Inflation, measured by the headline RPI, is expected to remain within the 2.5% to 3% range during 2006, with the high level of oil prices in 2005 failing to cause a rise in inflationary expectations.
In addition, base rates are likely to fall further in 2006. Further evidence of below trend economic activity, and confirmation that the rise in oil prices is not raising inflationary prospects in the medium term, are likely to trigger at least one 25 basis points reduction this year.
Unemployment rose steadily during 2005, reflecting the economic slowdown. The increase, however, has been very modest with the claimant count increasing by an average of 7,900 a month since January. Further rises in unemployment are expected in 2006, but these increases are again likely to be modest with the claimant count rising from 900,000 at the end of 2005 to around one million at the end of 2006. Accordingly, unemployment will remain very low in the context of the past 25 years.
Consumer spending growth is set to remain well below the pace recorded in recent years, although we expect a slight increase in growth to 2% in 2006, following an increase of 1.8% in 2005. During the five years between 1999 and 2004, growth in consumer spending averaged 3.2% per annum.
The saving ratio is expected to increase from 5.1% in the fourth quarter of 2005 to 5.5% in the fourth quarter of 2006 as spending rises more slowly than income growth for a second successive year. Despite this increase, the saving ratio is set to remain well below the 7.9% average over the past 40 years.
In summary, continuing economic growth, along with the high level of employment, robust earnings increases and the prospect of further interest rate cuts, will continue to support housing demand during the coming year.
House prices in the UK are estimated to rise by 3% in 2006.
High employment and falling interest rates underpin market.
Higher utility and council tax bills are a negative for home owners.
Repossessions and mortgage arrears are still at very low levels.
Three reasons regulator may drop by
Replacing outgoing Phil Loney
162,000 DB transfers taken place
Track auto-enrolment pots