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A few bubbles of price growth may burst

Significant deceleration in house price growth is unlikely until the second half of 2003, according to the National Association of Estate Agents' (NAEA's) latest economic report.

This latest quarterly report predicts that the Bank of England's Monetary Policy Committee (MPC) will leave interest rates on hold until at least the late Spring – a decision which, it says, will help to ensure that much of the recent strength in the housing market remains during the first half of the year.

The report continues the theme of the one for the previous quarter, which predicted a soft landing for the housing market. The expectation now is for a 'gradual, controlled re-balancing away from consumers and towards trade-exposed sectors.'

NAEA chief executive, Hugh Dunsmore-Hardy said, “There may be a few mini bubbles of exceptional house price growth that will burst but, overall, we expect the market to slow gently to a level that is still very healthy.”

This, according to the report, will be in response to a gradual pick-up in the global economy and a slowdown in demand for consumer credit induced both by tax increases and by somewhat higher interest rates in the second half of 2003.

The NAEA expects interest rates to rise to 4.5 per cent by the end of 2003, and house price inflation to fall back to single digit figures, giving a predicted overall figure for 2003 of nine per cent, compared with 20 per cent during 2002, according to the model used by the NAEA for its calculations.

With this will come a significant correction in the volume of residential property transactions, although these are expected to remain at historically high levels. As the report points out, a decline of seven per cent would still mean a market of 1.5m sales – a level of transactions not achieved during any year in the 1990s.

External factors could have an adverse effect on this generally benign picture, but the NAEA believes that, as long as there are no unexpected economic shocks from outside the UK, and if UK interest rates do not increase sharply, these risks should be manageable.

As for the raging debate over whether house prices are now overvalued, there appears to be no easy answer.

NAEA president, Julie Westby, said: “Expert opinion varies according to the definition of the term and the house price measure that is being used.”

“The worry for those who believe prices may be too high, is that people may find themselves with high levels of debt and low equity if the economic climate worsens significantly. However the British economy continues to outperform those elsewhere in Europe, and consumer confidence has remained stable as unemployment levels have continued to fall.”

“A steady hand on the tiller by the Bank of England and the UK government should ensure that the economy remains relatively stable and, as house price inflation slows during 2003, the market should continue to operate at a healthy and sustainable level.”