FT index shows house prices up in 2005

House prices have edged higher over the past five months according to the Financial Times house price index, the most reliable guide to prices paid in the property market, published on Friday.

In December, the average price of a property in England and Wales was £196,042, an increase of 2.7 per cent over the previous year. The small monthly increases since August, however, have not been sufficient to stop the gradual decline in annual house price inflation from its recent peak of 15.2 per cent in August 2004.

The housing market’s rise in 2005 was the lowest for a decade.

December’s figures complete a picture of tranquillity in the housing market in 2005, one that will delight the Bank of England. It has long been concerned that the rise in prices and the threat of a crash were having disproportionate effects on consumer and business sentiment.

Widespread fears of a housing crash at the start of 2005 dissipated, although the balance of opinion among economists is that the current prices are still higher than long-term sustainable values. Most economists, however, now accept that the economic forces weighing on house prices are extremely weak, so long as the wider economy is in reasonable health. Most now predict continued modest house price increases for 2006.

More properties have been selling in expensive areas, such as London and the South East of England, than earlier in 2005, when the housing market was propped up by the markets in the North of England, Scotland and Wales.

The return to house price growth in regions such as London, indicates underlying strength in the market, since moves in the South East and London often radiate across the rest of the UK over time.

The FT index is based on Land Registry data covering the sale price of all properties in England and Wales. Gary Styles, chief economist of Acadametrics, the consultancy that compiles the index, says that the market has begun to move higher, particularly in November and December, but he cautions that it is still too early to be sure to call a decisive turn in the market.

“We expect house prices to show only a low level of overall growth in the next 12 months as the market adjusts to high levels of personal debt and stretched levels of affordability”, he adds.

The index, which seeks to foreshadow the Land Registry’s index of price changes in England and Wales, makes an adjustment for seasonal variations and differences in sales patterns across the country and different types of house.

One important change over the course of 2005 has been the revival of more expensive property transactions, particularly in the South of England, compared with cheaper properties in the North of England and in Wales.

Without the adjustments for the differences in sales patterns, the annual rate of inflation would be higher at almost 5 per cent. This would have been purely a reflection of a rise in the proportion of more expensive housing transactions.

The need to use statistical models to give timely results can lead to revisions on past figures on the FT index as more information is released by the Land Registry.

Revisions have been bigger than usual this month, as the higher value property transactions reported were late to the Land Registry in October and November. The estimate of November’s average property price in England and Wales has been revised up 0.8 per cent, from £193,513 to £195,140.