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A Consumer&#39s view

The recent analysis of long-term trends in the housing market by the Council of Mortgage Lenders&#39 economist Dean Garratt makes interesting reading for both homeowners and those hoping to get a foothold on the property ladder. His conclusion is that house price volatility will lessen and there will be lower real increases in house prices over the long term.

But he qualifies his conclusion with the comment: “However, there remain questions about the supply and quality of the UK housing stock which could still undermine these conclusions.” What he has also ignored is regional demand, the ageing population and, equally important, the long-term effect of stamp duty at 4 per cent on properties valued at £500,000 or more.

Stripping out inflation, real increases in house prices have averaged 3.3 per cent a year over the past 30 years. In London, the figure is 4.5 per cent. Garratt argues that house price increases are driven by chan ges in income levels, He says: “It is accepted that, even over the long-term, housing demand in the UK is relatively responsive to income but insensitive to price. When households experience a period of growth in inc omes, they will increase their demand for housing markedly and be fairly insensitive to the price they pay. This leads to faster house price growth than would otherwise be the case.”

This is true but there are other factors at work which make predicting house price movements even more difficult. The services sector of the economy is booming and London and the South-east are the biggest beneficiaries of this growth. The City and financial services now account for nearly 30 per cent of GDP – a big engine for growth in the property market.

Prices of properties within commuting distance of London are already so high that single first-time buyers on average earnings of around £22,000 a year cannot buy, even on mortgage multiples of four times earnings.

Even a couple with joint inc omes of £44,000 a year would only be able to raise a home loan of at most £110,000 and probably only £88,000. This would not be sufficient to buy even a one-bedroom flat in many areas of London.

And the situation will get worse. Up until this year, there were considerable numbers of discretionary sellers. These are homeowners who could afford to move and wanted to do so for lifestyle reasons.

These tended to be couples without children, frequently with two incomes, often “empty nesters” in their fifties. They might trade up from a twobedroom flat to a house with a garden or a trendy loft with a roof terrace.

But the huge stamp duty taxation on moving will discourage these d
iscretionary movers, who will probably wait until their retirement to sell up and trade down to a property in the country.

To move from a property worth, say, £600,000 – not unu sual in central London – to a house valued at £850,000 will involve stamp duty costs of £34,000 plus estate agent&#39s fees of £15,000.

A bill of £45,000 plus the usual legal fees and expenses involved is certainly going to make anyone think twice about moving if they do not have to. Inevitably, homeowners will work out that it is better to stay put and spend the £45,000 on renovating the existing property.

The situation will be exacerbated in the short term by the mandatory requirement, to be introduced in 2003, for homeowners to produce a sellers pack”at their own expense. Estate agents believe that this too will act as a deterrent on discretionary sellers.

It is well known that what happens to London house pri ces ripples out to surrounding areas. If there are fewer transactions in the London property market because at the bottom first-time buyers cannot get a foot on the ladder and at the top end older owner-occupiers are staying put, the market could stagnate.

Whether this will push up the prices of the properties that do come onto the market – as was the case in the spring of this year – is difficult to predict.

Garratt maintains that “low inflation has the potential to keep households burdened by debt for longer, which reduces the speed at which homeowners can trade up”.

This is certainly true and, if Garratt is right, it looks as though house price rises above the rate of inflation could be a thing of the past.


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