The Edge

Richard Northedge takes on corporate finance

The property market is ready for take-off

House prices are still nearly 20 per cent below their peak but 2013 looks like being the start of the new housing boom. That could be the best stimulus to the economy there is.

The housing market is both a reflection of the nation’s confidence and a cause of economic fluctuations. Property was key to the financial boom and bust of the past decade with UK prices turning just as the crisis started to unfold in the late summer of 2007.

If fact most of the fall in prices was in the early years of the crisis: the Halifax index has been flat for the past two years but the falling number of buyers has demonstrated the weak market.

There are several reasons why prices will start to increase in 2013 however, one of which is that the number of buyers is rising again thanks to cheap mortgage rates. The interest rate cuts in the early years of the crisis were not enough to offset a deteriorating market, but the Bank of England’s Funding For Lending scheme has now cut rates even further so that mortgages are available for under 3 per cent.

This time the cheap money is fuelling a market ready to recover. The estate agents’ surveys and housebuilders are also reporting more prospective purchasers looking at properties. There is a huge pent-up demand from people who would normally have bought homes over the past five years but who have deferred their decisions. If they see prices start to move, there could be a wave of people rushing to buy a limited supply of homes, fearing that they will miss their chance if they do not hurry.

There are good reasons why people have delayed purchasing, not least the state of the economy. Rising unemployment deters buyers: it is not only the person who loses their job who doesn’t want to take on a major financial commitment, but the dozen people who worry that they may be the one that loses their job. But the same gearing effect works now that unemployment is gently falling: the fall is small but the numbers that no longer fear they could be next is much greater.

The main reason for not buying in recent years, however, has been that no-one wants to purchase an asset that is falling in value. For anyone buying with an 80 per cent mortgage, a 10 per cent fall in values wipes out half their wealth. But once there are signs that prices are rising, that reason disappears.

Property was overpriced in 2007. Adding inflation to the actual fall, real prices are now one third lower than then. By recent standards, that makes them cheap.

By the end of 2013 I think Britain will be reporting strong rises in property prices – the start of a new boom. Regulators will have the powers to dampen such bubbles in future, but don’t expect them to use them: the side effects are good for the economy.

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