We reported recently on the rift between the Governor or the Bank of England and the financial services industry, regarding whether or not house prices were likely to slow or crash. The Bank of England predicted a crash, whereas the industry predicted a slowdown.
There has now been a further report released by the Centre For Economics And Business Research, which wholeheartedly follows the view for a slowdown. The research predicted house price inflation to slow from over 22% in 2003 to over 15% in 2004. 2005 is a sharper fall in price growth to 3.5% but a negative of 1.5% in 2006. The CEBR is also predicting a top interest rate of 5.5% by the end of the year.
Our View
The report indicates that house prices will continue to rise across most of the country over 2004 and 2005. We assume that the prospect of increasing interest rates will reverse the growth to a negative in 2006. The more interest rates increase, the more of a struggle mortgage payments will become for those people open to standard variable rates.
Many people have borrowed to their limits to fund second properties. Interest rate rises could have an adverse effect on these people, meaning they have to sell. This in turn will flood the market with properties and suddenly the cycle is reversed - excess supply and lower demand. This will make prices fall.