House prices will increase 5% this year as SVRs go down, says CEBR

DOUGLAS
DOUGLAS MCWILLIAMS MORTGAGE RATE SPREADS TO FALL

House prices will finish the year 5% higher than they started it, with the average SVR down to 3% from 4%, according to the Centre for Economics and Business Research.

Its latest Consumer And Housing Prospects report forecasts that average mortgage rates will fall by 1% by early 2011 as the money markets price in the effect of cuts in the government’s budget deficit.

It argues that when the deficit cuts are made rates will stay lower for longer than is currently predicted, gilts and yields will fall, and further quantitative easing to offset the sluggish economy will affect the cost of money.

It predicts the mortgage rate spread over the Bank of England base rate will narrow as the markets price in interest rates staying lower for longer.
Currently, the consensus base rate expectation is 2.2% for the end of 2011 whereas the cebr’s forecast is 0.5%.

The Cebr’s analysis in-dicates that the base rate may be temporarily higher if there is a hung parliament, with a worst-case scenario of it reaching 3.5% by the middle of the year.

Douglas McWilliams, chief ex-ecutive of the cebr, says: “The spread between the base rate and the APR on average new mortgage offers is at an all-time high. One factor behind this is that the APR on new mortgages prices in likely base rate increases.

“But we think the next rate increase could be some two years away, and possibly more. When the market realises this the spreads on new mortgage rates will fall.”

Meanwhile, figures from the Land Registry show March house prices down 0.6% from February, with the average house price standing at £164,288.

The annual house price increase is 7.5%. All regions in England and Wales saw rises in average values in the past 12 months, with London leading the way at 13%.