Property - still an investment?; money & homes

Mortgage rates are at their lowest levels for 30 years and the average home costs a bare three times the average earnings compared with almost five times earnings at the peak of the boom in 1988. That means property is more affordable than at any time for a decade. With unemployment supposed to be at its lowest level for five years the scene should be set for a sustained rally in property prices.

A recovery is indeed definitely under way in the property market after five years of slump and stagnation, but it is unequally distributed and large sectors of the market, especially starter homes and large swathes of properties outside prime locations have seen no real recovery at all. According to the Halifax Building Society's quarterly survey prices across the country in the third quarter were 5.4 per cent higher than they were this time last year. But the range of increases goes all the way from 18 per cent in Northern Ireland, where the property market is still basking in the reflected glow from the IRA ceasefire, to 10 per cent in Greater London and down to just over two per cent in Scotland, Yorkshire, Humberside and East Anglia.

Worse still, turnover in the housing market is still depressed, with something like 1.3 million homes likely to change hands this year. That is well up from the low point of 1.14 million in 1995 but far below the peak of 2.15 million in the boom year of 1988. Optimistic estate agents are quick to point out that there is actually now a shortage of suitable homes for sale in many areas because potential sellers took their houses off the market when they could not find a buyer in the recession and have not yet realised that a seller's market is returning.

But this is not an entirely bullish factor. An artificial shortage of homes on the market could well be the biggest single reason for the local increases in property prices. If potential sellers do begin to put their homes on the market again in increasing numbers, turnover could rise, but a proper balance of supply and demand could help prices to stabilise.

And confidence remains fragile. Although the mortgage lenders and estate agents have been quick to claim that the surprise rise in base rates last month represents no threat to the recovery, the memory of rising mortgage payments, falling prices, and the horror of negative equity which locked almost two million buyers into their homes remains very fresh. There are still half a million people with zero or negative equity, which effectively means they cannot move because they cannot afford to clear their existing mortgage in order to qualify for a new one.

The housing market is also looking to the Budget in ten days time so see whether the Chancellor is planning a seasonal trick-or-treat. Ever hopeful optimists are wondering whether the Chancellor will raise the starting point for payment of stamp duty on property sales above the current level of pounds 60,000. But the pessimists are equally concerned that he might be tempted to press ahead with the phasing out of tax relief on mortgage interest in order to recoup some tax relief on mortgage interest which could be recycled in the form of a cut in the basic rate of income tax and an increase in tax free allowances. With mortgage rates at an average of seven per cent, the interest on the first pounds 30,000 of a mortgage should be around pounds 2,100. The tax relief at 15 per cent amounts to a maximum of pounds 27 a month, but spread across 11 million mortgages it costs the Exchequer nearly three billion pounds a year which in turn would allow him to make a cut of over 1p in the pound in the standard rate of income tax. The possibility is plausible enough for the estate agents' association to have specifically warned the Chancellor that abolishing Miras will do more harm to the recovery than a rise in mortgage rates.

Clifford German