Housing market set fair?

HBOS, in its latest economic forecast update for 2007, expects house prices to increase by 6% this year - this revision largely reflecting the greater upward movement in prices than expected during the first four months of the year. However, an increase of 6% would be one of the smallest rises in house prices since 1995 and would be below the long-term average of 8% pa recorded since 1983.

The lender notes that the increase in mortgage rates since last summer is having an effect on housing affordability and will increasingly bite over the second half of the year. Negative real earnings growth so far this year and rising food prices will also reduce the income households have available for housing.

Homeowners most likely to feel the pinch are those who took out cheap fixed rate mortgage deals as recently as 2 years ago - and which are now expiring. For example, a borrower with a £114,000 mortgage, taking out a two year fix in 2005 at 5.08%, faces an increase in monthly payments of around £65, or 10%, when the deal expires this year.

Despite feeling the pinch the overwhelming majority of these borrowers are still expected to be able to absorb the increase in payments. Most people's earnings will have risen since they took out the mortgage. Indeed, average earnings have increased by 7% in monetary terms over the past two years - providing more income to finance the higher interest payments.

Meanwhile, house prices are expected to rise most quickly in Northern Ireland (23%), Greater London (12%) and Scotland (10%) in 2007.

Elsewhere, the gap between the average price in the south and that in the north is expected to widen by £14,500 during 2007 to almost £105,000 by the end of the year. As a result, the £20,000 narrowing over the three years from Q1 2003 to Q1 2006 will have been more than reversed during 2006 and 2007.

On the interest rate front, HBOS expects base rate to rise further, although the peak is in sight. It predicts another 25 basis points rise over the next few months, taking base rates to 6%. Whilst further increases can't be ruled out, a subsequent decline in inflation, a slowdown in economic activity and a continuing absence of evidence of a marked pick-up in wage growth, should prevent the need for rates to go much beyond 6%.

20 July 2007 © Moneyextra.com

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