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Housing built on sound fundamentals

The Halifax house price index reported no change in house prices for January. Although prices in the three months to January were 1 per cent lower than in the previous quarter, house prices in January were 4.5 per cent higher than a year ear-lier. The average price of a home in the UK has increased by £7,628 over the past year to £197,244.

There are signs of a possible stabilisation in housing market activity. The RICS repor-ted a slowing in the rate of decline of new buyer enquiries during the past three months. However, the number of mortgage approvals to fund house purchase in the final three months of 2007 was 35 per cent lower than during the same period a year earlier, indicating a significant fall in housing market activity.

Sound economic fundamentals continue to underpin the housing market.

Employment – a key driver of housing demand – continues to rise. There was a 175,000 increase in the number of people in employment during the three months to December compared with the previous three months.

Employment was 296,000 higher than a year earlier at a record 29.4 million. Figures from the Office of National Statistics also showed that unemployment fell by 61,000 over the past three months to December. The strength of the labour market should continue to support the housing market.

The UK economy continues to grow at a healthy pace. According to recent ONS figures, the UK economy grew by 0.6 per cent between 2007 Q3 and 2007 Q4.

This quarterly rise was in line with the UK economy’s long-term rate of growth but slightly below the 0.7 per cent increase in 2007 Q3. Growth for the whole of 2007 reached 3.1 per cent, the fastest rate for three years.

The UK economy has grown for 62 consecutive quarters, extending the longest-running period of unbroken growth on record. The UK is expected to deliver its 65th successive quarter of GDP growth during 2008. No other developed nation can match this performance.

Recent data, however, confirms the increasing affordability difficulties faced by many potential purchasers as a result of the rapid rise in house prices in recent years. For example, at £197,244, house pri-ces are now six times average earnings against a longer term trend rate of 3.5 times earnings.

In addition, according to our latest research based on Government figures, last year saw a record fall in the number of owner/occupiers in England. The number of owner/occupiers in England fell by 83,000 to 14.538 million from 14.621 million in 2006, the biggest annual fall on record.

The fall in owner/occupancy was driven by a 2 per cent, 164,000, fall in the number of those buying a home with a mortgage.

The number of those owning their home outright ( that is, having either bought with cash or paid off their mortgage) failed to increase sufficiently to offset this decline, rising by 1.3 per cent to 81,000.

In line with our figures which high-lighted that first-time buyer levels hit the lowest levels since 1980 last year, there was a sharp fall – 235,000 – in the number of owner/occupiers below the age of 44 between 2005 and 2006.

We forecast that UK house price growth will remain flat in 2008. At a regional level, there will be pockets of growth in Scotland and Southern England while worsening affordability and weakening economies will lead to a small fall in prices in northern England and the Midlands.

These modest declines, however, need to be viewed in the context of the substantial rises recorded in recent years. For example, house prices in the North have risen by 192 per cent over the past 10 years and by 167 per cent in West Midlands.

House prices will continue to be supp-orted by a lack of supply. We calculate that the Government’s target of building three million new homes by 2020 is more than half a million short of what will be required based on current official household projections. Moreover, these household projections are likely to be revised upwards to reflect the recent significant increase in the Government’s own population projections. That means the housing shortfall could be even higher than we currently estimate.

On a final note, we expect that the Bank of England will cut interest rates at least once more in 2008. However, the Bank is likely to take a cautious approach, given that some inflationary indicators, such as oil prices, remain high. Lower interest rates should help to prevent the economy slowing too sharply, therefore supporting the housing market.

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