News

SERIOUS MONEY - By Kevin Brown

LONDON FINANCIAL TIMES 7th DECEMBER 2004

The house price rollercoaster took another unexpected turn this week as the Nationwide index rose by 1 per cent, seasonally adjusted, for November after falling in the previous two months, and the Halifax index fell by just 0.4 per cent afetr slipping 1.1 per cent in October.

Anyone whi is watching these numbers with a view to deciding their investment strategy (even if that only means whether or not to sell a weekend cottage) must be tearing their hair out by now.

But those who are taking a long term view will be less worried.  It has been clear for a year that the rate of price increases had accelerated beyond a sustainable level, and obvious since the early summer that a slowdown is underway.  What remains unclear is whether we are in for a soft landing or a crash.  But smooting the numbers over three months removes some of the volatility and gives a clearer idea of what is happening.

On this basis, average prices measured by the Nationwide index are up by 0.3 per cent a month, compared with 1 per cent a month in the previous three months.  That is consistent with the sulutary but not punitive impact of rises in base rates, and with falling expectations of price growth as the froth drops out of the market.

Andrij Halushka, economist at the centre for economiccs and Business Research, says the numbers validate CEBR'S forecasts of a soft landing.  As he points out, house prices are now 15 per cent higher than a year ago, only slightly down on October, when they were 15.4 per cent up over a year.

Of course, the future remains unknowable.  Halifax is forecasting a 2 per cent fall in prices next year.  But Nationwide is forecasting growth of 2 per cent - bang in line with the likely outcome for the five month period from the end of July.  That is barely ahead of the Bank of England's central forecast for inflation.  However, as I pointed out here a few weeks ago, it is now two years since housing bears started forecasting an imminent crash.

Nationwide thinks prices will rise by 13 to 14 per cent this year compared with 16 per cent in 2003.  If it is right average prices would have risen by 32 per cent in the past two years, and investors who picked the right areas will have seen larger increases.

Anyone who bailed out in 2002 would have missed out on a massive increase in the value of their property - enough to even ride out the most bearish forecasts, which are for a price fall of between 20 per cent and 30 per cent.  What is more, the long-term outlook for house prices remains robust.  The number of completions increased to 171,000 in 2003-04 compared with 153,000 the year before, and the improvement is forecast to be sustained in the current financial year.  That will have some impact on prices.  However, it is nearly 100,000 units a year short of the annual total needed to bring long-term supply into line with demand, as estimated in a report produced earlier this year for Gordon Brown, the chancellor, by Kate Barker, a member of the monetary policy committee of the Bank of England.