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At the end of 2001, and at the beginning of 2002, speculation grew about the effect 11 September wou...

At the end of 2001, and at the beginning of 2002, speculation grew about the effect 11 September would have on the economy. With the stock market plummeting and the US economy in decline many felt that this would take its toll on the UK, resulting in job losses, declining property prices and the possibility of a repeat of the economic situation in the late 80s which resulted in negative equity.

The only positive was that first-time buyers may have been letting out a sigh of relief at the thought of a possible reduction in property prices, enabling them to afford a home. But in the event, with the lowest interest rates for over 40 years, consumer spending and property prices increased at a faster rate than anyone could predict.

At the end of this year the housing market boom still continues, as evidenced by the 24% annual increase in the Nationwide house price index. However, the UK interest rate yield curve is very gradually steepening, so what predictions can be made about the housing market in 2003 in the light of developments this year?

Next year, house prices will probably return to trend growth of 5-10%. Housing supply will remain a problem in many parts of the South East because too few new homes are being built. The main determinants of house price inflation are personal disposable income and interest rates ‘ both base rate and longer term fixed and capped rates.

I forecast that the key determinants of personal disposable income ‘ average earnings and unemployment ‘ will continue to support the market in 2003.

Interest rates will rise, but only by around 1% across the yield curve. By the end of 2003, I would expect the base rate to be 5%. In the modern world a 5% base rate could well become the norm. 2003 will see a slowdown in the rate of house price inflation, but this will be a healthy correction, not a crash.

Average house prices have risen rapidly in 2002, in response to falling longer term fixed rates and the strong buy- to-let market. Housing shortages in the more prosperous parts of the UK have exacerbated the situation. With such a substantial rise in house prices, typical housing market indicators such as the price/ earnings ratio are looking somewhat stretched.

Yet the housing market out- look for 2003 remains positive ‘ an expanding economy and relative stability of interest rates.

Laurence Sanders is economist at Bristol & West Mortgages


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