Tread carefully to avoid crushing the shoots of recovery

14 June 2010

The average house price is now 9.5% below the peak reached in October 2007, according to the latest monthly report from Nationwide Building Society which shows that prices edged up 0.5% in May.

Despite the worst recession since the 1930s the record low level of interest rates and relative lack of properties for sale has fuelled a 12.2% rebound in prices from the trough they reached in February last year.

Nationwide says the current dearth of homes for sale is modestly upward trending prices.

The average cost of a home is now £169,162, the highest it’s been since July 2008. Meanwhile, the annual rate of house price inflation is 9.8%.

Banks granted 49,871 mortgages in April, up from 49,008 in March, according to the Bank of England. This is the highest figure since December and beats the forecasts of most economists.

But the government’s possible move to increase Capital Gains Tax from 18% to 40% on second homes may prompt those owners sitting on hefty gains to sell, and comes just as confidence seems to be returning to the buy-to-let market.

Whatever happens to CGT I’m concerned that the rally in house prices is fragile.

The possible move to raise Capital Gains Tax comes as confidence is returning to the buy-to-let market

The government is expected to introduce deep public spending cuts in its emergency Budget later this month, and pressure is gradually building on the Bank to raise interest rates to tackle inflation.

Any sudden shocks could have a serious effect on the housing market and reverse the positive trends that have been seen of late.
At this stage I would be happy if we ended the year with prices at today’s levels.

I believe the buy-to-let market will hold up as the private rental sector plays an increasingly important role in providing accommodation for hesitant buyers unless we see any seriously negative political gestures in the next few months.

Lenders are looking favourably at the sector which has also received a boost with the launch of Precise Mortgages, with more new entrants set to follow.

There is a significant need for new lenders to bring funding to the mortgage market. Precise has access to such funding and will bring much needed liquidity to the sector.

Meanwhile, annual buy-to-let returns have risen sharply along with increasing rents, according to LSL Property Services, the letting agency network that owns Your Move.

In the past year annual returns on buy-to-let property have risen to £19,765, or 12.8%. This means that the average landlord would have made some £7,115 in rent and £12,650 in capital appreciation in the past year.

So overall we are seeing some green shoots but let’s hope the government treads with caution so it doesn’t squash this fragile growth.

If you enjoyed this article, sign up here to receive daily email updates from Mortgage Strategy and Follow @mortgagestrat