Monday, November 22, 2004

Housing boom is over, but experts forecast no crash (UK)

By Scheherazade Daneshkhu and Jim Pickard
Financial Times

Galloping house price growth is over but Britain will escape a crash, according to forecasts published today by FPD Savills, the estate agents.

They will predict a 2 per cent rise in house prices next year, the lowest rate of growth for nine years.

Barclays bank yesterday sought to distance itself from a prediction by one of its economic advisers over the weekend that house prices would fall by 20 per cent over the next three years.

Christopher Smallwood said he expected property prices to fall by 8 per cent next year in the first stage of a 20 per cent fall over three years. But Barclays, which owns Woolwich and is the fifth largest lender, said the views of its group economics adviser were "not an institutional forecast." Mr Smallwood's views were one of a number that the bank listened to, it said.

It is certainly unusual, although not unprecedented, for a mortgage lender to forecast house price falls. In 1990 Halifax forecast a 10 per cent fall in house prices for the following year - although this was after the last housing bubble had already burst.

The property market can be volatile and sometimes driven by sentiment as much as the wider economy, making it notoriously difficult to pin down. But most of the big lenders agree that there will be a sharp slowdown next year in the rapid growth rates enjoyed by homeowners to date.

The Council of Mortgage Lenders looks bullish with a forecast of 8 per cent growth next year, but it is due to revise its forecasts and is likely to lower the figure.

One reason for the expectation that house price inflation will be lower next year is that prices have started to slow sharply. Both Halifax and Nationwide have reported month-on-month house price falls over the past three months.

Countrywide, the UK's biggest chain of estate agents, has reduced its staff count by 450 - 5.6 per cent - since the early summer because of the downturn.

The company has issued three profit warnings since August and last week said the number of sales in October was down 33 per cent on the same period a year ago.

Paul Cooper, head of mortgages at Alliance & Leicester, the eighth-largest lender, said there was no reason for house prices to crash given high employment, low inflation and good earnings growth.

"But prices in any market are formed by what people are prepared to pay. The fundamentals are fine but talking down the market will inevitably have an impact on consumer confidence," said Mr Cooper.

Barry Naisbitt, chief economist at Abbey National, the second-largest lender, said the rise in interest rates - from 3.5 per cent to 4.75 per cent over the past 12 months - had "clearly had an impact on affordability on the housing market". The outlook for property was "uncertain" but like many other lenders and estate agents, he expected house prices to slow and stagnate, rather than to fall sharply.

Richard Donnell, head of research at FPD Savills, expects house prices to grow by just 2.7 per cent in 2006 and 3.8 per cent the year after.

The view that house prices could fall sharply is more common among market economists, although hardly any expect this to contribute to an early 1990s-style recession.

Yesterday, Deutsche Bank said it expected prices to drop by 10-15 per cent over the next year and then to stagnate for several years.

The National Institute for Economic and Social Research, the think-tank, said house prices were overvalued by 30 per cent while Capital Economics, the consultancy, predicted prices would fall by 20 per cent. Additional reporting by Peter John

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