Average house price to hit £200,000 by 2015

One think tank reckons house prices will reach a new peak within four years

Last week Nationwide Building Society announced that house prices had fallen 0.6% in August, highlighting a sluggish demand and marginal rise in the number of available properties. Indeed, the lender’s entire house price report was fairly restrained, suggesting that prices will be stable, or perhaps fall slightly, over the rest of the year, and highlighting some of the significant issues that the housing market still faces.

So it’s somewhat surprising that a rival report has predicted house prices will see double digit growth in the next four years, taking the average property price past a whopping £200,000.

The latest forecast from the Centre for Economic and Business Research has predicted house prices will rise by a whopping 14% over the next four years, taking the average house price up to £200,700.

Brilliantly, despite such a positive prediction, the CEBR explicitly states that “We do not expect a house price boom”. So why is it so confident that prices will rise so significantly?

Four years of growth

The CEBR has revised its forecast for this year up from a fall of 1.4% to a fall of 1.3%. After this it reckons that house prices will rise gently – after all, back in May, it suggested house prices would grow by 16% over the next four years.

There are three factors behind this prediction. Let’s take a look at them and see how realistic they are.

A shortage of housing

I remember my old economics tutor drilling three words into us over and over again: supply and demand.

And that economic truism is a big factor behind the CEBR’s positive predictions for house prices (I know it’s debatable whether house prices going up can be classed as a ‘positive’ thing but for the purposes of this piece, that’s the word we’ll use).

According to the firm’s study, only 110,000 new homes will be built every year, compared to the 225,000 homes needed annually to keep pace with housing needs, population growth, and the trend towards reduced household sizes.

Last year, just 105,000 new homes were built in England, the lowest level since the 1920s. However, with the Government pledging to act on the housing shortage, there should be at least a little cause for optimism that more homes will be built than the CEBR expects. The proof will be in the pudding, though, and the fact remains that not enough homes will be built to meet the growing demand.

An increase in mortgage availability

The think tank reckons that there will be a gradual increase in the availability of mortgages. And if more people can access mortgage funding, more people will be able to compete for properties, helping to push those prices up.

It’s worth highlighting just how poor the current mortgage lending levels are.  The Council of Mortgage Lenders, the trade body representing almost all UK lenders, recently increased its gross mortgage forecast for 2011 to £140bn from £135bn, which sounds great, but even £140bn is well below par in this country.

Here are the mortgage lending levels for the last few decade:

You could make the argument that mortgage lending can’t get much lower, and so is bound to increase over the next couple of years.

Perhaps.

But it’s important to remember that lenders are being forced to increase their capital levels by new European rules, which will restrict the amount of cash they have available to lend.

And if they can’t lend, it will become mightily difficult for potential buyers to get enough cash together for the property they want, leaving many sellers to have to consider dropping their prices. We’re already seeing signs of this – Rightmove has reported that house sellers have dropped asking prices for the second straight month, this time by 2.1% following a 1.6% fall in July.

Loose monetary policy

The CEBR reckons that base rates won’t head beyond 2% in the next four years, with mortgage rates not moving too much from current levels, and potentially even falling if there’s another period of quantitative easing.

This one is of course complete conjecture. While I don’t expect base rate to move sharply upwards, I would be somewhat surprised if it was 2% or lower in four years’ time. And with mortgage rates currently at record low levels, I’m not sure they can get much lower.

Of course, when you look beyond the headline figure, the growth predicted by the think tank is not that outrageous – it works out at an annual growth of 3.5%. However, I’d still be pretty surprised if the CEBR is proved right on its house price forecasts for the next four years.

But what do you think?

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