House prices baffle market

DISAGREEMENT in the housing market deepened this weekend as building societies rejected the claim of a leading City economist that the value of most people's homes would not rise for the rest of this century.

The row highlights the growing bewilderment within the industry over why house prices remain so weak. Roger Bootle, chief economist at Midland Montagu, told a silent audience at the Building Societies Association conference last week that the market would remain flat at least until 2001. After adjusting for inflation, the value of most people's homes was likely to fall, he said.

Building society spokesmen rejected his arguments as absurdly pessimistic. "As people get richer and the supply of houses remains restricted, prices go up," said Gary Marsh of the Halifax. "Therefore I do not think prices can fall in real terms."

However, optimistic forecasts by the societies have repeatedly been disappointed over the past few years and they are again having to admit that the market is still on its back. The Halifax has been forced to downgrade its forecast of house price growth this year from 3 per cent to zero. On Friday, UBS halved its forecast from 6 to 3 per cent.

The Inland Revenue, which collects stamp duty, recorded the lowest number of sales in April, on a seasonally adjusted basis, than in any month since records began in 1977. New loan commitments by building societies slumped 33 per cent from March to April. There remain about a million home owners with negative equity - houses worth less than their mortgages - following the first real falls in house prices since the war.

While no one disputes that this year will produce virtually no price increase, the main argument is over whether the market will recover next year - or not for years to come.

The Halifax believes that in 1996 there will be a rise of 4 per cent, followed by 8 per cent in 1997, falling back to around 4 per cent again for subsequent years. This would hardly be sparkling by 1980s standards but after the dismal experience of the past few years it would gladden the heart of every home-owner.

But Bootle's view is that far from rising, house prices may actually fall in real terms over the next six or seven years. Factors in favour of rising house prices, such as the shortage of land and good housing, will be more than outweighed by a changing attitude to home-ownership in Britain. The crucial factor, says Bootle, is that inflation has at last been conquered and will remain below 2 per cent for the next few years. In the past, the British bought houses as an investment, partly to hedge against inflation, with the result that they purchased bigger houses for higher prices earlier in life than they would otherwise have done. Those attitudes, however, will fall away over the next few years as people come to see houses simply as places to live.

This will tend to reduce both turnover and prices in the housing market as people no longer trade up simply for financial gain. Bootle thinks it likely that nominal prices will therefore not change at all before at least 2001, implying a slight fall when adjusted for inflation.

The optimists argue that this does not take account of the effect of rising personal incomes on the restricted supply of housing. The market has been dull only because of fears of rising interest rates and unemployment. They believe the 1980s house price bubble has well and truly burst, leaving room for a renewed price rise as soon as interest rates show signs of falling again next year and consumer confidence picks up.

This view may, however, be yet another triumph of hope over experience. With clear signs that the economy is beginning to slow down again and the "feelgood" factor a distant folk memory, the market could take far longer to revive.