Market Need Not Fear Collapse

The absence of any clear-cut pattern in recent monthly price changes suggests that a dramatic collapse in house prices is unlikely. A forecast compiled by the Council of Mortgage Lenders (CML) suggests that widespread confidence that UK interest rates have peaked has already helped to stabilise the housing market. Estate agents and surveyors across the country report that house price weakness is likely to continue for some while and that annual house price inflation is heading towards a largely static picture for the second half of this year and into 2006. CML originally forecast a modest growth of 4% but are now expecting the Halifax and Nationwide house price indices to dip into negative territory later this year. They do not, however, regard the drop as a precursor to a period of substantial or sustained house price falls across the country. The Council expects house prices to stabilise for a few years, allowing earnings to catch up and the price-earnings ratio to realign itself within a more manageable range. Affordability problems will take a while to resolve meaning the market will remain subdued for longer than originally perceived. Activity in 2006 and 2007 is estimated to be at around 1.3million, similar to the level typical of the 1990s. With first-time buyer numbers decreasing, CML expects much of the reduction to come from movers. In addition, a period of weaker activity in the buy-to-let market is forecast as lower house price growth limits the potential for capital growth. CML?s report comes as the Bank of England announces a 0.25% lowering of interest rates to 4.5% - the first change in the cost of borrowing since August 2004, which it hopes will inject a little more life into the economy.