MONEY COMMENT
House Prices Are Levelling Off

By Cliff D'Arcy
December 3, 2003

The Halifax, Britain's biggest mortgage lender, released its latest House Price Index on Wednesday morning. It revealed that the average house price increased to £139,405 in November, from £138,050 in October. That's an increase of just below 1%, with the annual rise estimated at 14%.

The annual change in the average house price hit a recent peak in November 2002, soaring to 28%. Since then, it has fallen in every month bar March (when it rose a mere 0.2%). Even at its current level of 14%, house-price inflation is way ahead of its long-term average of around 8%, which suggests that this particular boom has yet to run its course...

Halifax also claims that the average homeowner is currently spending under 14% of his/her gross income (before deductions) on mortgage repayments. This is far less than the 21% average of the last twenty years, and is thanks to the UK enjoying the lowest interest rates since the mid-1950s.

However, although housing appears affordable for current homeowners, the picture looks far less rosy for first-time buyers. Without the equity that homeowners have built up, first-time buyers are forced to rely on a hefty deposit or a high income to join the property pyramid game. Sadly, the majority have neither substantial savings nor an above-average salary, so more and more will be forced to sit out the sidelines and watch the game develop.

(However, Halifax's press release describes the last two years as a period of 'exceptional increases', which suggests that even it is trying to blow the froth off the housing bubble!)

I always take great pleasure in reading the 'spin' that Halifax puts in its report. For example, there were around 1.12m property transactions in England and Wales in the first ten months of 2003. Over the same period of 2002, this figure was 200,000 higher, at 1.32m. The mortgage lender describes this 15% drop as 'stable'! It goes on to predict the full-year figure for 2003 at around 1.4m, considerably less than 2002's 1.58m.

Another Halifax comment that I would take issue with is, "Although consumer credit remains high, historically low interest rates means that borrowing is still very affordable." Focusing purely on interest payments ignores the fact that we have £168 billion of non-mortgage debt, which we really should get around to paying off, the sooner the better.

What's more, our credit-card debt has absolutely rocketed - from £10bn ten years ago to over £52bn in September 2003. As one-tenth of all our spending is being funded by credit, my view on the UK's growing debt crisis is much more pessimistic than our leading mortgage lender's!

Another problem that I have with house-price indices is there's often a huge variation between them - the figures from Halifax, Nationwide BS and the Land Registry rarely tally. This makes it difficult to get a definitive snapshot of the UK housing market.

In any event, as a mathematician and ex-marketing manager, I always fall back on my catchphrase, "Averages invite comparisons!" For example, prices may be rising across the UK as a whole, but they have been flat or falling in my neighbourhood (and West London as a whole) for more than a year now. On the other hand, prices are booming in the North, in an infrequent reversal of the North-South divide.

When all's said and done, and whatever happens to UK house prices, what's important is how affordable your home (and housing in general) is to you. It doesn't matter how much buyers are paying elsewhere in the country, all that matters is what's happening to you at a local level. Everything else is just filler for the comment columns!

More: The Perfect House Price Index | Putting A Price On Your House | Visit our Homeowning Centre.

The author owns shares in HBOS plc, parent company of the Halifax.