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Sound foundation for the property market

It was all going so well. According to Nationwide, house prices rose by over 12 per cent last year, with transactions up by 17 per cent to 1.44 million from 1.24 million in 1996.

Although the market was not exactly back to the boom time of the 80s, at least it was getting back to normal.

The 1997 level of transactions is the highest this decade although this is against the historical background of a low of 1.1 million in 1995 and a high of 2.1 million in 1988. Not a boom maybe but the market was recovering.

But 1997 ended with a bump. During the last three months of the year, IFAs started complaining that business was falling back into the doldrums.

In December, Nationwide warned that weakened demand would lead to annualised house price increases of less than 8 per cent in the last quarter compared with 15 per cent the previous quarter.

IFAs complain that their mortgage business was squeezed into the first nine months of the year and they were then left with little to do in the run-up to Christmas.

Lenders showed the pressure by trying to win business through special offers on commission or by offering better discounts for applications made before the end of December.

The five base rate rises imposed by the Bank of Eng- land from May to November were seen to be taking their toll.

Against this backdrop, many analysts and lenders, including Abbey National, Nationwide and Halifax, are cautious about their predictions for the housing market in 1998.

Most expect a continuing, albeit more modest, recovery. Abbey National is calling it a "period of consolidation", as it believes there will be a slowdown in growth in terms of house prices and sales.

The reasons for this are due to expectations that the general economy will slow down as the series of windfalls which boosted consumer spending tail off.

Nationwide believes that house price increases will be 7 per cent. Halifax claims there will be a 5 per cent rise in house prices this year.

Both lenders believe the level of transactions will rise by about 5 per cent to 1.5 million in 1998 compared with the 17 per cent rise to 1.44 million in 1997. Mortgage broker John Charcol forecasts that transactions will be about the same as last year.

There are even risks to this moderate recovery, due to uncertainty about possible future rate rises and, in the longer term, the problems posed by entry into Emu.

Nationwide head of research Paul Sanderson says: "There was a weakening in demand at the end of last year, as shown by house price rises and feedback from surveyors and estate agents, but the question is, is it temporary or will it continue? It is probably temporary but the effect of higher interest rates, not directly, but on consumer confidence, is a risk."

Most major lenders are adamant that further interest rate rises are unnecessary. Private Label executive chairman Stephen Knight believes the market has already slowed down and that there will be no increase in gross lending in 1998.

So what does this outlook mean for IFAs? Although it will be a very tough market which will be particularly competitive for lenders, there are opportunities for IFAs.

IFAs&#39 market share is growing within the existing market, according to John Charcol, and most industry comm- entators agree there will be a healthy level of activity in the remortgage market in 1998.

This is because around one-third of British mortgage holders pay rates that are reviewed annually, mostly in the first few months of the year, and so are about to be hit by last year&#39s rate rises.

For example, a person with a £50,000 mortgage will find their payments up by about £45 a month if they are on a standard variable rate, according to Nationwide.

Such opportunities make Savills Private Finance managing director Mark Chilton upbeat about next year. He is dismissive of interest rate fears.

He says: "For us, our market is very strong. For the mainstream market it will be a good steady year. There are no horror stories on the horizon although, on the flip side, no major opportunities. But some of the first big bubbles of the remortgage fixed rates will come out in the summer.

"A customer who took out a three-year fix in 1995 will not have too much overhanging redemption penalty. The fix will come to an end this year and IFAs will be able to offer them amazing deals because products are so competitive.

"The IFAs who will win are those who look after their customers rather than chasing after new ones, by using their database."

John Charcol also expects lively activity in the mortgage market and is developing a remortgage product for its new range. Marketing director Ian Darby says: "There are bucketloads of remortgages to be done. An obvious product to sell is the remortgage product, with easy entry in cash terms."

Over the longer term, as the prospect of joining the Economic and Monetary Union looms, the mortgage market is expecting interest rates to fall to come into line with rates in Europe. Two- and three-year fixes are expected to be popular as a result, rather than five- or 10-year products.

Despite the modest growth predictions and competitive market, IFAs remain optimistic. Donnellson partner Richard Verdin says: "Business will be more evenly spread and there will be less peaks and troughs than last year. If you are running your own business, it will allow you to plan better because it will be a more stable and predictable year."

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