House prices to rise and interest rates to fall, says John Charcol

House prices in the UK will rise by 5.5% by the end of 2006 and the Bank of England base rate could drop by 0.75% in the next 12 months, says John Charcol.

While there was only one base rate reduction during the whole of 2005, speculation has been rife throughout the year on the impact of the Monetary Policy Committees decisions on the stability of the housing market.

Ray Boulger, senior technical manager at John Charcol, says: “To achieve the desired impact on the economy, Bank base rate nearly always needs more than one movement so we expect a number of cuts in 2006. The Bank of England has made it clear that it intends to alter the interest rate to influence inflation next year, despite house prices being targeted over the last few years. House prices are unlikely to move sufficiently in 2006 to overly concern the Bank and the below par growth in the UK economy will inhibit inflationary pressures.

“The major uncertainty on the inflation front is the price of volatile commodities, particularly oil. However, current indications are that inflation will fall from its current level (2.3% annual rate in October) to below the Banks target level of 2% by the third quarter of 2006. In anticipation of this we expect to see at least two, but probably three, base rate cuts in 2006, with the first 0.25% coming in the first quarter.”

Boulger adds: “Some confidence returned to the market after Augusts base rate cut. Transactions, in the second half of 2005, were well above the preceding six months as vendors, who had been holding out for higher prices, accepted lower offers. Interest rates are by far the most important influence on house prices and the cuts we expect in 2006 should stimulate a gentle upward movement in prices as confidence and affordability improves further.

“The ratio of house price to mortgage payments is far more relevant than the house price to earnings ratio favoured by many economists and by the former measure house prices are not expensive. Therefore they will rise at a steady level and we expect them to grow by approximately 5.5% by the end of 2006.”

Boulger says that the recent decision by the government not to allow residential property into self invested personal pensions should mean good news for first-time buyers. Much of the property that was being lined up for investor landlords may now make it into their hands.

He says: The governments proposed shared equity schemes will enable a relatively small number to get onto the ladder when it starts in October. Although these plans are a starting point, expect to see more private schemes in the near future offering rent free shared equity mortgage deals.”

Boulger believes that more lenders will follow The Woolwichs and Accords lead on retention by offering new business rates to existing customers while still allowing them to use a broker to source. He says failure to do this will result in a continued high proportion of customers defecting from their lender after their initial deal has finished, resulting in the lender paying a fee again and incurring more admin costs, simply to replace the lost business.

On the prospect of Home Information Packs, Boulger says: “Expect to hear a lot more about HIPs as the year progresses. Despite delaying the start date from January 1 2007 to June 1 2007 it still looks unlikely there will be sufficient qualified HIP inspectors by that date, even though the level of training required is far lower than for a chartered surveyor. This will force a further delay and the closer we get to a general election the less likely the government will be prepared to risk the voters wrath by inflicting on them this extra cost of selling a property. With e-commerce increasingly becoming part of the house buying process HIPs are yesterdays solution to yesterdays problem.”