City bonuses are likely to push up prices even further in London and the South East. So, what does the future hold for the housing market in 2007? Dale Lovell reports.

Few could have predicted that after a year of moderate growth in 2005 that 2006 would see annual growth of up to 8%. But is this sudden rise in house prices likely to last, or, after ten years of unstoppable growth, are prices edging closer towards the precipice, with a ‘crash’ imminent?

If we look at the figures realistically no one can argue that growth rates of 8-10% are likely to continue in the long-term, not when first-time buyers are taking out loans of up to five times their salary (Read More: Abbey to Lend Five Times of Salary), clubbing together to buy with friends (Read More: Buy with Friends: Advice), and borrowing from family members for deposits.

But the major reason for continued house price growth remains, and is likely to remain for sometime ahead, and that reason is that demand continues to outstrip supply. Government figures, based on conservative migration assumptions, project that 209,000 households will be formed a year; at current completion rates less than 160,000 new dwellings were available in 2006 - a shortfall of around 50,000. The situation is unlikely to ease in the short-term as new dwelling starts are currently running at only 45,000 per quarter.

A recent economic report from the banking group HBOS found that house builders in the UK are falling well short of meeting demand, which inevitably contributes to solid price growth.

Director General of the Council of Mortgage Lenders, Michael Coogan, argues that the housing market is undoubtedly in robust shape. “Looking ahead, mortgage lending looks set to remain seasonally strong over the winter months, reflecting a continuing high level of transactions and house price growth,” he said. “As for 2007 as a whole, we expect to see gross lending total around £360 billion - another record breaking year.”

As the two recent increases in the (Read More: Interest Rates Unchanged, but for how long?) Bank of England’s base rate demonstrate, the Monetary Policy Committee - who decides on whether or not to adjust rates - are worried about the continued growth of house price inflation.

Economists vary widely in their opinions on where the Bank Rate will end in 2007, with forecasts ranging from 4% to 6%. If house price inflation continues to grow, it is foreseeable that the Bank may raise interest rates early in 2007, but leave rates at 0.25% higher than they are now at 5.25%. A major economic event aside, it is unlikely interest rates will fall or rise considerably in 2007.

For the first half of 2007 then we can expect to see the buoyancy of the housing market continue. Fionnuala Earley, Nationwide’s Group Economist, told Finance Daily that she expects to see a few months of double-digit annual house price inflation in the first half of the year.

“However, increasingly poor affordability and likely cutbacks at the Bank of Mum and Dad will cause the rate of house price growth to move back into single digits in the latter part of the year,” she said.

Ray Boulger, Senior Technical Manager at John Charcol, one of the UK’s largest mortgage advisors, believes property prices will slow in 2007. He said; “The year on year figures will progressively see 2006’s strong growth fall out and be replaced by slower growth in 2007, resulting in the figures easing back over the course of the year, to end it with an annual rise of around 4.5%.”

While the housing market will remain strong into the spring of 2007, many predict that the market could face a wobbly few months in the summer when HIPs – Home Information Packs – are due to be introduced in June. The Government has hailed HIPs as becoming an integral part of the home buying process. Under the new law home owners or their estate agents will have a legal obligation to have a Home Information Pack for customers, outlining the key issues surrounding the property so that buyers can make an informed decision. Good news for buyers, bad news for sellers, who are likely to have to shell out between £300 and £600 on HIPs each time they sell.

David Smith, Head of Residential at Dreweatt Neate believes that HIPs could distort the housing market. “Vendors will want to market their homes during March, April and May to save the cost of the Home Information Pack,” he says.

“There will then be less properties coming fresh onto the market during June, July and August, but we will be affected again by all houses then on the market needing a HIP from 1st November.”

But Smith stressed that over the year as a whole HIPs were likely to have little effect on house prices, but the “inevitable muddle over implementation of the HIPs will restrict supply more than demand, so could be a contributor to price rises.”

Regional Differences

While interest rates and the ever-widening grip of Buy-to-Let investments are national factors influencing property prices, regional differences are also likely to influence growth in 2007.

Nationwide predict that property prices in London are likely to increase by 10% in 2007, partly reflecting the relative underperformance of the capital in the earlier part of 2006. The effect of lucrative City bonuses are likely to increase prices at the top end of the market and as the Olympics draw nearer, prices are likely to rise. The strong performance of London is likely to have a knock-on effect throughout much of the south east, particularly in the Home Counties.

The North and Midlands can expect to see more modest growth than the south with house prices growing at around 3-4% in line with earnings growth, but also reflecting that housing supply shortages are not evenly spread across the UK. The more severe housing shortages are in the south of the country while in the North, Wales, Scotland and Northern Ireland there is much less of a mismatch.

Northern Ireland and Scotland cannot expect to see house price growth on the scale experienced in 2006. Fionnuala Earley, Nationwide’s Group Economist believes the strong 2006 property performance of Scotland and Northern Ireland represents “some element of catch-up as the earnings gap to the UK in both countries has narrowed over the last three years,” she said.

“However, such rapid growth rates are not sustainable in the longer term. We expect house price growth of around 9% in Scotland and 12% in Northern Ireland in 2007.”

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