House price increase - too good to be true?

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By Luke Jovetic
Know Your Money Editor

In February the average house price was down to £147,746 and prices were falling by 18 per cent year on year, according to Nationwide. But things seem to be improving, house prices have increased almost six per cent since April and positive reports from the likes of Nationwide and Halifax in September have shown that prices have been on the increase for several consecutive months. Prices are back at the same level that they were 12 months ago but despite this the amount of mortgages being approved is half of what it was then.

The market has found support due to a shortage of properties being put the market, combined with an improved demand from buyers who are tempted back to the market following the recent steep price falls and record low interest rates. However, in addition to this, the recent pickup in the property market is likely to cause more people to put their properties up for sale, easing the shortage that has, in part, led to the recent price rises.

Where in the country is feeling the effects the most?

The recovery in prices is not the same across the country, with markets in the south, particularly in London and its outlying areas, performing far better than those in the north, where property seems more readily available, Savills suggests.

A report by the estate agency for the Sunday Times showed that the county of Hampshire has received the biggest property price surge, with values rising by almost ten per cent from their lows in March. Despite this, prices are still 12.7 per cent off the peak hit in September 2007.

Lucian Cook, the agency's director of research, told the newspaper that much of the bounce can be directly linked to the upturn in London. He said: "Traditionally, what starts in central London is seen two or three months down the line in the southeast, then in East Anglia and progressively up north. In this upturn, we've just seen a slightly quicker ripple effect into south-east England."

The report shows that many commuter destinations for London are benefiting from the largest increase in house prices. Counties shown as seeing little change in house prices include Lincolnshire and Warwickshire, where prices for prime country houses have risen by less than one per cent in the past six months.

Improvement but potential for a fall?

Despite the economy seemingly starting to recover and an upsurge in house prices experts seem wary of predicting a return to the property price boom that was seen at the start of the decade.

Ray Boulger, senior technical manager at John Charcol, was positive about the current climate, indicating that the property price increases had come despite high levels of unemployment and difficulties in obtaining a mortgage. He said: "I think during the next few months there is every indication that prices are going to keep rising."

Martin Ellis, Halifax's housing economist, said: "A lot of the improvement has been driven by supply being very tight, but there is evidence that people are beginning to react to the improvement in market conditions and are more inclined to have a go at selling their property."

However, Fitch Ratings said it expected the value of property to fall by a further 17 per cent from its current level, leaving prices 30 per cent below their peak in October 2007. In financial terms a decrease in value of this percentage would knock an additional £28,000 off the average price of a home, leaving it at £134,000 on the Nationwide measure.

Brian Coulton, head of global economics at Fitch Ratings, said: "The UK's average house-price-to-income ratio remains significantly higher than the long-term average. A 30% fall from the peak of October 2007 would bring this ratio back in line with the long-term average. "In comparison, the house price declines in the recession of the early 1990s saw the average house-price-to-income ratio fall below the long-term trend." The group warned that unemployment is set to increase next year and remain high until 2011 and that as it has yet to be reflected in house prices it will inevitably lead to a fall.

So perhaps the mix in expert opinions suggests that there seems to be little need for people looking to purchase a house to rush in to doing so. As the housing market goes through a period of transition there seems little certainty that prices will rapidly increase or significantly tumble.

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