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Counting the cost of property in the UK

Following a remarkable 10% increase in UK house prices in 2006, recent trends suggest that in 2007 there is likely to be a slowdown in national growth

No article on house prices would be complete without reflecting on the substantial national growth in 2006. If someone had told me a year ago that a rise of 10% would be recorded for 2006, I would have laughed. But hindsight is a beautiful thing house prices rose by 10% against forecasts of just 3%.

But as 2006 drew to an end, December house price data reported the first drop since June 2006: house prices fell by 1% in December. While it is too early to say whether this indicates a genuine slowdown, it acts as a timely reminder for those in the mortgage market.

Regional Outlook for 2006

Seven out of 12 regions recorded double-digit house price rises in 2006. Northern Ireland stole the show with an annual rise of 53% the highest since the West Midlands in 1988 (60%). East Anglia (13%), Scotland (12.5%) and Greater London (12.2%) delivered the largest house price rises in the UK during 2006. Last year also saw the first double-digit annual rise in the capital for four years. The 13.0% rise in East Anglia followed a fall (-1.0%) in 2005, and the South West recorded double-digit growth (10.5%) in 2006 after a 1.9% decline in 2005.

House prices now top 100,000 in all regions; there is just one town in the UK where the average price is under 100,000 Lochgelly in Fife (96,925). This compared with 2003, when more than 100 towns had an average price less than 100,000.

Northern Ireland

Northern Ireland recorded an average rise of 53% for 2006. The jewel in Northern Irelands crown was Newry, which recorded the biggest rise of all UK towns (54%). Furthermore, all of the 10 towns delivering the biggest price rises were in Northern Ireland, making 2006 Northern Irelands year.

So what has been going on in Northern Ireland? The rapid rise in house prices there in the past year reflects strong employment and high immigration, which have boosted demand. There has also been demand from second-home buyers and buy-to-let investors in Ireland attracted by the relatively low prices in Northern Ireland. Towns with good links to the major centres have experienced strong conditions. Newry, for example, has good access to the capitals of Ireland and Northern Ireland, with train journeys of 40 minutes and 75 minutes to Belfast and Dublin respectively.

The strong performance of house prices in Northern Ireland in 2006 has taken the average price from 128,917 at the end of 2005 to 196,874 in Q4 2006. It is forecast to record the highest house price rise in the UK for the second successive year in 2007. Growth is expected to be around 15%, which would see the average price exceed 200,000 by the end of the year.

Greater London

In Greater London, the average price had increased to 287,176 by the end of 2006 an annual rise of 12.2%. It was the first double-digit annual rise in the capital for four years, taking average house prices above the inheritance tax threshold 285,000 for the first time.

All regions, except London, are expected to record lower house price growth in 2007 compared with 2006. House prices in the capital are set to increase by 8% in 2007 for the second year running. A buoyant regional economy and what is looks to be record year for City bonuses are likely to stimulate demand for properties in London. There will also be a knock-on effect in the South East where prices are expected to increase by 6%, above the national average. But this will be countered by the recent interest rate rises and affordability constraints owing to high prices in and around the capital.

North-South Divide

Since 2003, the gap between the North and South has narrowed year on year, but 2006 saw it widen for the first time. The average price in the South was 90,013 higher than in the North in Q4 2006 9,000 bigger than the gap in Q4 2005. The North reported the lowest annual rise in 2006 (3.1%). The slowdown of house prices, combined with strong performance in the South served to widen the North-South divide.The North-South divide looks set to continue widening in 2007 and the North will experience a third successive easing in house price rises. We predict that the divide will increase to around 97,500 by the end of the year. This, with the widening in 2006, will reverse the 20,000 narrowing over the three years from Q1 2003 to Q1 2006. The most expensive town in the UK is still in the South Gerrards Cross, Buckinghamshire, where the average price is 724,594.

Whats on the cards for 2007?

Based on recent trends, there are some things that are likely to happen in 2007. Strong demand and limited supply make continuing rises likely, but more steadily than in 2006.

Interest rates are at their highest for five years. The two quarter-point rises at the back end of last year, and the further increase this month, are likely to encourage homebuyers to be cautious over the coming months.

Mortgage payments account for 22% of a new borrowers gross income. This is slightly above the long-term average of 19% and is at its highest since Q3 1992. It remains well below the peak of 37% reached in 1990.

It is likely that house price inflation will ease off in 2007 and drop below the average 8% increase a year as recorded since 1983 to around 4%. This would be the smallest increase in house prices since 1995.

Slower economic growth, modest real earnings growth and greater pressure on household finances largely owing to higher utility and council tax bills will also help to ease in house price inflation.

Regional Picture

All regions, except London and the South East, are expected to record lower house price growth in 2007 compared with 2006. Prices are forecast to increase most slowly in Northern England, with this part of the UK experiencing a third successive easing in annual house price inflation as affordability becomes an issue.

Property transactions in England and Wales are forecast to fall by 5%. The number of transactions, as measured by the Land Registry, is predicted to decline from 1.2 million in 2006 to 1.15 million in 2007, following a 17% rise in 2006. With prices strong, and buyers being cautious, it is likely that lenders and intermediaries will need to up the ante to win new customers in 2007.

The challenge for 2007 is how to maximise opportunities in an ever-changing market. The winners will be those who fully use the range of revenue opportunities and who develop the products to best enable people to buy in an increasingly unaffordable market.

Jack Saxton, managing director, Halifax Intermediaries

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