What value are house price forecasts…?

‘Tis the season to be jolly’, that time of year when national estate agencies forecast property price movements.

When considering their headline grabbing predictions, what strikes us as remarkable is that the exuberance of their forecasts extends over the coming five years.  To summarise, for the mainstream markets across the South East, predictions include:

Agent                                                              2014                             to 2018

Strutt & Parker                                                 + 4%                             + 13%

Chesterton Humberts                                      + 5.4%                          + 25%

Hamptons International                                  + 7%                             + 22%

Knight Frank                                                    + 7.6%                          + 24%

Savills                                                               + 7%                         + 31.9%

(for prime markets)                 `                + 4%/5%                + 23.3%/25.1%

Whilst we agree with the pundits’ forecasts of a gentle 4% – 6% price escalation for the mainstream markets over 2014, we do feel their longer term optimism is open to question.  Excluding those factors likely to affect values in the immediate future (see ), we perceive potential threats to longer term price rises from:

–          ‘Help to buy’ schemes, underpinning affordability, have certainly helped fuel demand in the mainstream market (to the extent that economists are already voicing concerns at a price bubble).  However, the life span of such schemes is finite;  not only are warnings already being voiced that the banks might start to run out of this wave of mortgage money by mid-2014, but also they are unlikely to continue beyond a 2015 election.

–          Interest rates.  The new regime at the Bank of England has committed not to raise base rate by 0.25% until unemployment drops below 7 million (predicted in 2016) – but growing mutterings in the money markets suggest that the speed of economic recovery might mean that this threshold will be cleared much earlier.  Furthermore, few economists seem to believe that Mr Carney has actually got an effective brake handle to use in fulfilling his promise not to allow another property price bubble!

–          Even three or four years ago, few could have predicted such an extended period of diminishing mortgage interest rates;  two year fixed rate mortgages are now available at between 1.5% and 2.5% and five year fixed at 2.6% – 3%.  As economic recovery becomes tangible and interest rates strengthen, this supply of cheap money will evaporate – leaving many at the end of their fixed rate terms facing reversions to rates of 4%+ (representing increases of 16% – 30% in monthly repayments).  One can only imagine the effect that a sudden surge of forced sellers would have on house values……

–          A General Election in 2015.  When was the last time we saw activity in the property market in an election year? Political rhetoric of any colour seems to deter anyone from reaching a financial decision….