The truth about house prices

Contrary to opinion in some quarters it is uncool to discuss the increase in value of your house over dinner, even with prices rocketing. No, the smart thing is to discuss the increase in value of your second property, the one you acquired last year for investment purposes and rented out for more than the cost of the mortgage.

The equation is simple, or so the buyer thinks. A house costs pounds 100,000, you put in pounds 10,000 borrowing the rest, and rent the place out for the cost of the mortgage and other bills. When the value of the property goes up 10 per cent next year your house is worth pounds 110,000, which means you have doubled your personal stake in 12 months. Easy.

Of course, this doesn't cover estate agents' and legal fees, 1 per cent stamp duty, 10 per cent management fees and repair costs. Nevertheless, such simplistic equations, put forward by certain financial planners, are in part responsible for the upward movement in house prices. Hundreds of thousands of people with less nakedly speculative aims took their first step on the housing ladder in 1996. Their hope is that their property won't tumble in value.

To buttress the purchase borrowers rely on two sets of figures: the increase in property values reported by the Halifax and Nationwide reports. Earlier this month, the Halifax reported that prices rose by more than 8 per cent in 1996. These are coupled with predictions by many experts, most notably Rob Thomas, the housing guru at the Swiss bank UBS. He believes the market will soar by 10 per cent this year and a further 10 per cent in 1998. Nor is he on his own. Every other analyst predicts rises in excess of 8 per cent for this year. Before you take the plunge, however, there are things to bear in mind. The first is that price increases are expected to level out at a far more neutral 3-5 per cent by 2000. With inflation taken into account, that's a standstill level. Second, mortgage interest rates are predicted to be about 8 per cent by the end of the year. This would add a minimum of pounds 46 a month, or about pounds 550 a year, to the cost of an average pounds 60,000 mortgage.

Third, the present increase is based partly on a high demand for properties combined with low numbers in supply. As more people decide to sell demand falls and prices will stabilise. Finally, any price rise is not the same throughout Britain. Surveys by Bank of Scotland and Black Horse Agencies found that in some parts of the country property values barely rose at all last year. It took several weeks longer to sell a house in London than in Scotland.

So, if you want security, a roof over your head or a gently appreciating investment over 25 years, buy now. But if you want instant speculation, stick to the lottery.