Hometrack research forecasts house prices to rise

Average house prices are forecast to rise by just 1% over 2006 and by an average of just 2.1% per annum over the next three-years, a research report from Hometrack has shown. A continued decline in the number of residential property sales over 2006 is expected to act as a support to prices.

Richard Donnell, director of research at Hometrack, says: House price growth over 2005 is set to be the lowest for a decade. Whilst activity levels may have improved over the autumn on the back of more realistic pricing it does not automatically follow that prices will start to rise. Affordability constraints remain the biggest barrier to house price growth over 2006. We expect the annual rate of house price growth to remain in low single digits over the next few years, supported by fewer sales and a continuing shortfall in new housing supply. These low levels of house price growth will result in a steady re-alignment of household incomes and house prices to more sustainable levels.

Donnell also believes that the pre-budget announcement on SIPPs will not affect the forcast.He says: We expected the original proposals to have only a very limited impact on the housing market overall. The proposed introduction of Home Information Packs from mid 2007, on the other hand, has implications for the availability of housing and levels of turnover over medium term.

The headline forecast hides some marked regional variations. Donnell adds: Over the next three years we expect the best prospects for growth to be in London, the South East and Scotland. These are the regions where affordability constraints are least pronounced. Small price falls over 2006 are expected in most other regions, especially those that have seen very high levels of house price growth in recent years and where affordability levels are most stretched. However, over the next three years average annual growth is expected to be in positive territory across all regions thanks to continuing high employment levels, and household income growth improving affordability.

Levels of market turnover have been declining since 2002 and are set to reduce further and act as a support to price levels according to the Hometrack research report. The number of open market residential sales is expected to be 1.23 million over 2005, 10% down on the recent peak seen in 2002. The forecast is that sales volumes will fall a further 5% over 2006.
Donnell adds: We expect the volume of housing sales to fall back again over 2006, and the time between moves to rise. This is a result of slow house price growth, fewer aspirational movers and the need for larger amounts of equity to trade up to the next rung of the housing ladder. Higher transaction costs, as a result of the increases in stamp duty over recent years will also play a major role in lower levels of turnover.