Gloom over prices on the home front

Soaring inflation, high unemployment rates and a weak economy are beginning to dent homeowners’ confidence in the housing market – but experts believe low interest rates will keep house prices largely flat in the coming months.

Expectations for house price growth over the next year turned negative this month, with homeowners at their gloomiest about the outlook for prices since May, according to the Knight Frank/Markit’s October House Price Sentiment Index (HPSI) published this week.

It found that households in eight of the 11 regions studied expect prices to fall in the coming year, with homeowners in the north-east expecting the biggest declines, followed by those in the south-west and Yorkshire and the Humber.

“The sharp reversal in sentiment for future house prices came as a raft of disappointing economic data signalled the UK was struggling to emerge from recession,” says Gráinne Gilmore, head of UK residential research at Knight Frank.

However, confidence in the housing market varies significantly across the UK. Homeowners in London, the east of England and the south-east continue to be optimistic about future house price rises.

Figures this week from Rightmove’s latest house price index support a growing divergence between the north and south of England. The index, which measures the price at which sellers advertise their properties, rather than the achieved sale price, revealed that average asking prices in the south rose by 4.7 per cent in the past month, but have fallen by 0.7 per cent in northern regions.

“I often refer to the Rightmove index as a greed gauge – it’s an indication of how much people hope to get or want to get for their house,” explains Henry Pryor, a UK housing expert.

Pryor says the index shows many areas in the UK are having no problem with optimism in the housing market. “The problem is they are being too optimistic,” he notes.

From September to October, the average asking price in central London and the City rose by 9.8 per cent. The region is also the highest riser over the past year, with asking prices increasing by 11.3 per cent.

A breakdown of Rightmove’s data at a local level (see map) shows that the ten biggest risers over the past year have nearly all been in the south of England, with Warwickshire and Swansea the only exceptions. In comparison, the cities that have seen the biggest drop in average asking prices from a year ago are nearly all in the north of England.

But housing experts believe the strong buoyancy of trophy homes in the prime central London market may be starting to peter off.

According to figures from Savills, house price growth in the capital began to slow in the third quarter of this year, after months of strong performance. Prices rose by just 1.1 per cent over the three months to the end of September, compared to a 6.4 per cent rise from January to June.

“Over the course of 2011 we’ve seen really strong levels of growth, but I suspect you will start to see a softening in levels of that price growth,” says Lucian Cook of Savills.

Pryor notes that Land Registry figures show the percentage of the market in London made up of sales of houses over £1m peaked at 8 per cent of all sales in April, but by May it had fallen to 3.5 per cent, rising slightly to 4 per cent in June.

Ed Mead, director at Douglas & Gordon, the London-based estate agency, believes the domestically driven parts of the London market have quietened in recent months.

“The family house market, which had been very busy, now seems to be pausing. I think it’s a little bit about the state of the economy but also there is some buyer fatigue going on with prices because they have increased so dramatically,” he says.

Mead believes London is starting to follow the rest of the UK and will see sellers reduce their asking prices. “Outside London they are beginning to accept that valuations are too high and I think that’s beginning to trickle into London. That will help create a little bit more activity in the market,” he notes.

However, other housing experts think that house prices will not fall significantly over the short term.

Gilmore says that low interest rates “are propping up prices to a large extent”, as people pay less on their mortgages, leading to a lack of distressed sales.

“I think we’ve got something of an abnormal equilibrium in the market at the moment in that we’ve got high inflation and a weak economic recovery on one side but we’ve got very low interest rates on the other,” explains Cook.

He believes there are no drivers for significant house price growth or significant house price falls. “This strange equilibrium is keeping house prices largely flat,” says Cook.

Mead believes the housing market is unlikely to change significantly in the coming months.

“I see central London values edging upwards but they won’t beat inflation, while I see prices around the immediate ring around central London coming off a bit and therefore in real terms falling quite a bit.”

However, Pryor is more bearish on the mainstream market. “I think prices will be down 7 per cent by the end of 2012.”