Housing Recovery

Perhaps earlier than many thought, house prices have continued to stabilise. Halifax’s measure of the longer-term house price trend, which compares the past three months with the previous quarter, rose 0.8%, a positive rise for the first time since the autumn of 2007. House prices in July rose 1.1%. The Royal Institution of Chartered Surveyors have now changed their predictions for house prices. Instead of predicting a fall of 10-15% for 2009, they now expect house prices to be slightly higher.

From an economic perspective there are also growing signs of economic recovery. Manufacturing output increased, retail sales have nudged higher and forward looking indicators like purchasing indexes have showed improvements. Yet, despite, hopeful signs of economic recovery, many are still nervous about the fragility of the recovery. Bank lending remains close to record lows and consumers are still reluctant to spend on big ticket items.

These worries have encouraged the Bank of England to resume its policy of Quantitative Easing – creating another £50bn. The Bank are hoping this will lead to further lending and make the recovery more lasting.

Prospects for Future Housing Recovery.

Although house prices have fallen 25% since their peak, they are by no means cheap by historical standards. Price to earnings ratios are still much higher than their post 1990 crash level. It seems zero interest rates are encouraging homebuyers back into the market. House prices are also been kept high by the relative shortage of properties on the market. As the economy recovers in 2010, interest rates are likely to rise. Assuming a modest recovery, interest rates will not rise too rapidly and the gap between base rates and commercial rates may narrow again.