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Halifax releases Welsh economic forecast

Amanda Jarvis

December 22, 2005

The Welsh housing market is expected to perform in line with the rest of the UK in 2006. Welsh house prices are predicted to rise by 3 per cent, broadly in line with the predicted rise in retail price inflation. We estimate that prices in Wales have risen by 14 per cent in 2005, placing Wales behind only Northern Ireland in the UK.

Economic fundamentals remain sound. Continuing economic growth, the high level of employment in Wales — which has risen by 7,000 over the past year to 1.33 million – robust earnings growth, and the prospect of further interest rate cuts are all likely to support a healthy level of housing demand during the coming year.

A number of factors are, however, expected to slow house price growth. Both council tax and utility bills across the UK are expected to rise by well above inflation in 2006, causing non-mortgage related housing costs to rise above the current 66% of total housing costs. This will put pressure on household finances and more than offset the expected benefit of lower mortgage rates.

Housing in Wales is now less affordable than the UK average. The current house price: earnings ratio in Wales is 5.8 compared with 5.5 for the UK as a whole. The historically high level of house prices relative to average earnings is expected to curb housing demand as first-time buyers, in particular, struggle to enter the market.

The Welsh economy is forecast to strengthen into 2006. The Welsh economy is likely to grow more strongly into 2006, reflecting the positive influences of August's interest rate cut and a better outlook for the Welsh labour market. Economic growth is set to rise above 2 per cent, placing Wales as one of the better performing parts of the UK.

Welsh Housing
The Welsh housing market is expected to perform in line with the rest of the UK in 2006. Welsh house prices are predicted to rise by 3 per cent, broadly in line with the predicted rise in retail price inflation. We estimate that prices in Wales have risen by 14 per cent in 2005, placing Wales behind only Northern Ireland in the UK.

Economic fundamentals remain sound. Continuing economic growth, the high level of employment in Wales — which has risen by 7,000 over the past year to 1.33 million – robust earnings growth, and the prospect of further interest rate cuts are all likely to support a healthy level of housing demand during the coming year.

A number of factors are, however, expected to slow house price growth. Both council tax and utility bills across the UK are expected to rise by well above inflation in 2006, causing non-mortgage related housing costs to rise above the current 66% of total housing costs. This will put pressure on household finances and more than offset the expected benefit of lower mortgage rates.

Housing in Wales is now less affordable than the UK average. The current house price: earnings ratio in Wales is 5.8 compared with 5.5 for the UK as a whole. The historically high level of house prices relative to average earnings is expected to curb housing demand as first-time buyers, in particular, struggle to enter the market.

UK Regional Housing
House price slowdown in the north to continue next year. The annual rate of house price inflation has slowed significantly in all the regions of the UK over the past 12 months. It is now in single figures with the exception of Scotland, Wales and Northern Ireland. The slowdown in house prices outside southern England is expected to continue during 2006 as affordability becomes an increasing issue for more potential homebuyers.

We expect to see some signs of modest recovery in the south and the midlands during 2006. House prices, however, remain historically high relative to average earnings throughout these parts of the UK: a factor that will continue to curb housing demand and prevent a marked pick-up in prices.

The pricing variation between regions is likely to compress for the third successive year. The biggest gains are forecast for Scotland (7 per cent) and Northern Ireland (5 per cent) where prices are lowest in relation to earnings. East Anglia (0 per cent) and the South West (1 per cent) are expected to record the smallest price gains.

The north/south divide will continue to narrow. These increases should result in average house prices in the south being 1.5 times as high as in the north at the end of 2006 compared with 1.6 at the end of 2005. The north/south divide has narrowed substantially since a peak of 2.2 in mid 2002. Taking a longer historical persepective, the north/south divide would still be slightly wider than ten years' ago (1.4 in 1996 Quarter 4), but below the 1.7 average over the past 20 years.

City bonuses to boost the upper end of the London market. Higher City bonuses than in previous years are expected in the New Year. This will boost demand at the upper end of the London housing market. This, however, is a very small segment of the capital's housing market. The three London boroughs with the highest average prices — City, Westminster and Kensington & Chelsea — account for only 4 per cent of the total Greater London owner-occupied housing stock.

As buyers hunt for bargains, towns recording the biggest price rises are likely to be close to major conurbations. Specifically, towns with house prices below regional averages are most likely to attract the attention of bargain hunters. The following towns are expected to deliver the biggest price rises next year: Clydebank, Renfrew, Airdrie and Wishaw (all in Strathclyde) and Nelson and Burnley in the North West. All these towns currently have an average house price that is either below, or just above, £100,000. There are now only 11 towns out of the almost 500 surveyed across the UK where the average price is below £100,000 and two of these towns are in Wales (Aberdare and Ebbw Vale). Last year there were four Welsh towns where the average price was below £100,000.

UK Homeowners
Buyers have been putting down bigger deposits than in previous cycles. 81 per cent of all new borrowers took out a mortgage of less than 90 per cent of the house price during the first half of 2005, according to the CML. This was significantly lower than in 1989 and 1990 when 56 per cent of new borrowers took out a mortgage of less than 90 per cent of the house price.

Far fewer 100 per cent loans than in the past. The number of borrowers taking out 100 per cent loans has remained consistently low over the past few years, comprising only 5 per cent of new borrowers in first half of 2005 compared with 22 per cent in 1990.

Arrears and possessions are likely to remain low. The numbers of repossessions and cases of mortgage arrears both increased in the first half of this year, according to the CML. Both, however, remain at extremely low levels by historic standards. For example, the number of properties taken into possession during 2004 H2 and 2005 H1 was 7,710; just over 10 per cent of the total in 1991 (75,540). In line with the industry, nevertheless, we expect a modest rise in arrears and possessions during 2006.

ECONOMY

Welsh Economy
The Welsh economy is forecast to strengthen into 2006. The Welsh economy is likely to grow more strongly into 2006, reflecting the positive influences of August's interest rate cut and a better outlook for the Welsh labour market. Economic growth is set to rise above 2 per cent, placing Wales as one of the better performing parts of the UK.

Base rates are likely to fall further in 2006. Further evidence of below trend UK economic activity, and confirmation that the rise in oil prices is not raising inflationary prospects in the medium term, are likely to trigger at least one 25 basis points reductions next year.


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