Times: Are we set for a recovery in house prices?

The Times (London)
August 21, 2005

Are we set for a recovery in house prices?
Property sales are up and there is even talk of price rises - yet not
everyone is convinced, writes Kathryn Cooper

THE housing market has reached a crossroads, with some commentators
detecting tentative signs of a recovery while others predict further
gloom.

The Royal Institution of Chartered Surveyors (Rics) said last week that
homebuyers returned to the market in July, buoyed by expectations of an
interest-rate cut in August. Property sales have increased by 10% since
their low in February and asking prices, while still falling, are
declining at their slowest pace in five months, surveyors said. Some
are even predicting price rises in London and the northwest over the
next three months.

However, homebuyers banking on further interest-rate reductions,
following the Bank of England's quarter-point cut earlier this month,
had their hopes hit last week.

Inflation, as measured by the consumer prices index, rose to an
eight-year high of 2.3% in July, making another rate cut less likely.

There was more bad news for homebuyers when the Council of Mortgage
Lenders (CML), the industry's trade body, slashed its house price
forecasts. It predicts that prices will slip 2% this year, compared
with its earlier forecast of a 4% rise. It also thinks there will be no
growth between January this year and December 2007; previously, it was
forecasting gains of 8% in that period.

House-price inflation is already at a nine-year low.

Halifax says prices rose by just 2.3% in the year to July, the lowest
rate of growth since April 1996. And the Financial Times house-price
survey, which tracks all sales rather than just those with a mortgage,
said prices increased by 4.2% over the same period - a slightly
bigger rise than Halifax, but still the slowest since August 1996.

Simon Tyler of Chase de Vere Mortgage Management said: "The market is
at a turning point, which is why we are seeing so much conflicting
data. One of two things could happen: the market could stabilise and
run flat for several years, or there could be a correction in prices."

So which way is the market heading? Are conditions stabilising, as Rics
suggests, or is the market still mired in a slowdown? Lee Bailey, 33,
and his girlfriend, Claire Fisk, 26, are among the homebuyers who have
returned to the market in recent months. Bailey, a development manager
for Chester Sports Partnership, and Fisk, an account manager for a
pharmaceuticals firm, started looking for their first home two years
ago, but soon gave up when they became disheartened by inflated asking
prices.

However, they started hunting again in April and have just had an offer
accepted on a two-bedroom house in Wilmslow, Cheshire, which was on the
market for =A3175,000. They are taking a fixed-rate mortgage through
Savills Private Finance, a broker.

Bailey said: "We decided to start looking again in the spring because
the market seemed to have stabilised. Interest rates appeared to have
peaked and we noticed that it had become a buyers' market. Property
was staying on the market for longer, making it easier for us to get
what we wanted."

According to Rics, this is a common story. Milan Khatri, chief
economist, said: "There are signs of recovery in the market. Would-be
buyers have become more confident because the economy remains sound and
the interest-rate outlook has improved. The impact of the four rate
hikes last year also appears to have faded."

Khatri is not predicting a renewed price boom, however. "The market was
extremely depressed earlier this year and any rebound is from very low
levels. Completed sales are still 18% lower than a year ago and stocks
of unsold properties are relatively high, which will restrict prices
for some time."

He points out that the balance of surveyors are still reporting price
falls. If that remains the case for the rest of the year, it would be
consistent with declines of about 2% or 3%, as predicted by both the
CML and Halifax.

Economists believe the market is likely to remain subdued even if rates
are cut in the coming months. Richard Donnell of Savills, an estate
agent, said: "An era of low, single-digit growth lies ahead because it
is hard to see where the impetus for further rises will come from. Even
if rates were to fall by between a half and one percentage point over
the next 12 months, it would not be enough to support a big pick-up in
growth because it would only offset other pressures, such as higher
energy bills and the rising cost of owning a home."

Capital Economics, a consultancy, is even more pessimistic: it is
sticking to its forecast that prices will drop 7% this year and a total
of 20% over three years. Ed Stansfield, UK economist at Capital
Economics, said: "With the economy slowing and property still
overvalued, we believe further price falls this year, next year and
beyond remain likely."

However, most economists predict only modest price declines or subdued
growth. The silver lining for the housing market is that as prices come
down, affordability improves, so more first-time buyers, the lifeblood
of the market, can get on to the ladder.

Tyler said: "We recently saw wage inflation overtake property price
rises for the first time in four years, and that is a very positive
sign for buyers because it will help improve affordability -
particularly in areas where prices are already easing back. House
prices in London have fallen by an average of 2.5% in the past year
which, when coupled with strong wage rises, means more people can
afford a home."

Many commentators, including Nationwide and Savills, think the property
market in the capital will outperform the rest of the country this
year.

However, buyers are being advised not to get carried away by signs of a
recovery. Khatri said: "You should not expect a sharp rise in prices,
even if the market has turned round. Do not get into the market if you
are banking on a quick profit."

Sellers should also remain realistic. Khatri said: "Activity has picked
up, but there is still so much property on estate agents' books that
sellers should not expect to get their asking price or find a buyer in
a couple of weeks."