Property: House prices forecast to rise 10 per cent

House prices will be 10 per cent higher in five years’ time than previously expected, the official forecaster said yesterday, in a prediction likely to stoke concerns that the Government’s mortgage market subsidies risk creating a destabilising house price bubble.

The Office for Budget Responsibility (OBR) admitted house prices had grown much more strongly this year than it expected at the time of the March Budget. It estimated that prices would grow by an average of 3.5 per cent a year over the coming years, opening up a 10 per cent gap on its previous forecast by 2017-18.

The OBR said its modelling suggested the Chancellor’s Help to Buy mortgage guarantees, which could underpin up to £130bn worth of new mortgages, would feed through “roughly one-for-one” into house prices in the short term. Help to Buy was introduced by the Government, ahead of schedule, in October. In his Autumn Statement yesterday, George Osborne announced that two challenger banks, Aldermore and Virgin, were planning to join the scheme.

But the watchdog also said that higher property prices would not stimulate a proportional increase in the supply of new housing. “Recent rates of housing starts have been very weak and, given the characteristically slow response of supply to rising house prices in the UK, we expect only a weak supply response in the near term,” it said. With demand outstripping supply, prices will rise.

The forecaster also revised up its forecast for household borrowing, saying people would need to take on more debt to buy homes. The ratio of household debt to incomes is now projected to rise to 160 per cent by 2018.

Last month the Bank of England’s Financial Policy Committee (FPC) announced that from January, it would be withdrawing the cheap funding that banks can enjoy for mortgage lending under its joint Funding for Lending Scheme with the Treasury. The FPC cited its concerns of the formation of a house price bubble.

House prices fell 14 per cent from the end of 2008 to the middle of 2009. They have now returned to their previous peak, but transactions remain about 40 per cent below their pre-crisis levels. Prospective property buyers have been constrained by tighter lending standards from banks.

House prices have been strongly boosted by acquisitions of homes in exclusive areas of London by foreigners. The Chancellor announced yesterday that such buyers would no longer be exempt from capital gains tax when they sold a home that was not their primary residence.