Housing market like pantomime season

Oct 30 2003 By Peter Jackson, The Journal

Nights are drawing in, Christmas is coming and the pantomime season will soon be upon us.

Although in the housing market, the pantomime season seems to be with us all year round. We can all join in the refrain: "The housing bubble is about to burst. Oh no it isn't. Oh yes it is." This week it was the turn of the optimists - if you regard rising prices as a cause for optimism - with the latest report on the property website Hometrack, which says prices continued to rise in October by 0.4pc, the same as September.

This agrees with recent surveys from the Royal Institute of Chartered Surveyors and the property website Rightmove, which would all suggest a recovering market after a short period of stagnation. Furthermore, according to the British Bankers Association, a total value of £23.3bn of mortgage loans was approved in September, 37pc up on the same month last year.

But hang on a minute, only a fortnight ago, the latest Government figures showed the rate of house price inflation in August dipping to 14pc from July's 14.6pc. And before that, we had gloomy predictions of prices falling 20pc over the next 18 months. Forecasters at Capital Economics predicted a fall in the average house price from £135,000 in 2004 to below £110,000 in 2007 before the start of a gradual recovery.

If this isn't confusing enough, the Government survey estimated the average cost of a house in August to be £159,010. How this is to be reconciled with Capital Economics figure for 2004, I have no idea, unless we are in for a sharp fall before Christmas. Historically, periods of house price inflation have been followed by corrections of varying severity. Also the doomsters can point to a widening gap between average earnings and house prices, indicating that current prices are becoming unaffordable.

Optimists, on the other hand, say that sharp house price falls in recent decades have been caused by sharp rises in interest rates.

We are living through a period of low interest rates and these make mortgages more affordable, despite the prices and earnings gap. There is much in that, but we have to remember that while interest rates are low, so is inflation, so true rates are comparable to what we were accustomed to in the higher inflation years. Higher inflation means the mortgage debt is steadily eroded.

In this small island we have limited land and a shortage of housing stock and at the same time, through demographic factors such as a higher divorce rate, we have an increasing demand. That can only mean rising prices. I would, however, emphasise that that is a long-term trend.