Expect pressure on house prices

Gemma Harle is managing director of TenetLime

It’s that time of year when traditionally we ask where house prices and interest rates are going.

Both are important barometers of homeowner confidence for the wider economy. The outlook for interest rates suggests we are not in for any change soon. The threats facing the economy still outweigh the sporadic evidence of growth.

At most we can expect one or two incremental quarter per cent moves towards the end of the year.

As for house prices, recent evidence is not promising. In September 2010 there was the biggest fall in average house price (3.6%) for over quarter of a century 28 years according to the Halifax. There are several reasons why house prices will continue to remain weak.

Firstly, there is fragile consumer confidence. The prospect of spending cuts in 2011 is raising fears of a prolonged economic slump.

When you add the supply side issues facing the mortgage and remortgage market in terms of funding and regulation that will make it even harder to get mortgages such as interest only products, it’s easy to see why the market will take long time to recover.

Falling prices make remortgaging harder and deter first time buyers who opt to rent as the strong performance in rental yields demonstrates. People seeking to liquidate assets as they or their parents move to sheltered accommodation or look to boost pension and long-term care income will put additional pressure on prices.

Of course we should balance these points with the facts that house prices defied expectations in 2009 and early 2010, indicating the UK still has an underlying shortage of housing relative to the population but this will help stem the fall rather than increase the value.

At least very low interest rates have increased mortgage affordability and these are going to be around for a long time to come yet.