The Centre for Economics and Business Research (CEBR) predicted that in 2007 house prices could rise by £1,000 a month. Their argument to support this bullish view of the UK housing market is based on the strong underlying performance of the UK economy.
In particular they point to the large city bonuses being paid out in the financial sector. Workers in the Square Mile are expected to take home nearly £9 billion which includes record levels of bonuses. This will maintain strong demand for housing in London and the South east.
Other factors that point to rising house prices is the level of real interest rates. Interest rates are currently at 5.25% . This is the highest level for 6 years. However the level of real interest rates are not particularly high. This is because with CPI inflation at 3% and RPI at nearly 4%. The effective cost of interest rates is actually still quite low. Therefore this explains why the rise in interest rates has had little effect on dampening demand.
However the CEBR do expect house price inflation to tail off at the end of the year.
However their analysis could be criticised on several grounds. Firstly city bonuses are not reflective of the wider economy. Thus house prices away from London may not see the rising demand.
Secondly the £ is overvalued at nearly $2. Many economists think that at some point in time the £ will need to devalue to reflect its true purchasing power. If the £ does devalue it will increase inflationary pressures. Therefore this will require higher interest rates to compensate.
Thirdly there is increased evidence that the buy to let market is slowing down. The returns from renting a house are now less than the cost of a mortgage. With buyers concerned about a potential fall in prices, demand in this area is likely to be weak. There is also the possibility many buy to let landlords may take 2007 as an opportunity to sell and cash in on their capital gains.
There are mixed opinions about the prospect for house prices in 2007 but recently the council for mortgage lenders predicted a more modest increase of 7% in 2007 and 5% in 2008
See also : Future UK house Prices
See also House Price Crash f
or more predictions in 2007
More info: Times – house prices to soar