Where will house prices go next?

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• Published: 16 Jun 2010 in Money and Mortgages

By Stephen Jones

It’s been a confusing few months in the housing market. With the recovery that followed the crash in 2007-8 now appearing to be stalling, there have been only small monthly fluctuations in values since the start of this year. 

Halifax is among a number of industry voices predicting that house prices are likely to remain flat throughout 2010 – others, however, think even this view is too optimistic. 

After a decade of incredible house price inflation which saw prices soar by more than 120 per cent, are we wrong to assume that the market will just return to business as usual once economic uncertainty is out of the way?

The Budget 

With the new coalition government’s first Budget approaching fast, there is much speculation about potential changes to capital gains tax (CGT). While Chancellor George Osborne appears likely to announce moves to bring the levy closer to income tax levels in his statement on 22 June, we don’t know when the change would come into force.

Many commentators expect the timing of the rise to be significant for the property market. CGT is only levied on second homes or buy-to-let properties, but some argue that an immediate increase could see investors pull properties they were planning to sell – pushing prices up by further restricting the supply of homes. 

On the other hand, a delay of up to a year before CGT changes are introduced may cause investors to flood the market in order to sell before the rise hits, causing a significant fall in home values. 

Clearly any changes to CGT would affect different homeowners in different ways. As Nationwide pointed out in its latest house-price index, those who have owned their second home or investment property for a long period and were planning to sell up, perhaps to pay for their retirement, may now be particularly anxious to sell to avoid the new rates. This is because they are likely to have accrued the biggest gains since their properties were bought. 

However, someone who invested relatively recently is unlikely to see any value in selling up soon as any gains will most likely have been wiped out in the fallout of the credit crunch. 

A different view 

Despite this speculation, Paul Holmes, CEO at Firstrung – a mortgage broker aimed at first-time buyers – doubts the changes will really have the impact that is being suggested; particularly as HMRC figures show that only 270,000 people in the country paid capital gains tax at all during the 2006-7 tax year.

Instead, he predicts that the rise in CGT may “prick the bubble” of casual landlords buying proporties opportunistically – meaning some good news at least for those looking to own their first home. 

On the subject of prices, Holmes believes that more pain is on the way. 

“This Con-Dem government is going to introduce an awful lot of short, sharp, shock measures in order to get the medicine into the economy as quickly as it can,” he says. As a result, he expects to see a steady fall in prices of around 20 to 25 per cent over the next two years. 

So what to do? 

While Holmes is significantly more pessimistic than most, it’s pretty difficult for anyone to accurately call what is going to happen in a market where so many factors are at play.

Let us not forget that the economic recovery remains incredibly fragile, and with unemployment expected to continue to grow following substantial public sector cuts, it’s not just CGT that estate agents will be keeping a worried eye on in the chancellor’s Budget statement. 

As a result, it’s best not to try to and predict, and instead act according to your needs. If you’re looking to buy or sell a property, it’s never wise to rush any decisions simply due to a change in taxation. Instead, finding a bargain and getting a fair value for your own property remains as important as ever. 

Remember, with interest rates set to rise in the coming months and years, it’s key not only to think about what you can afford now, but what you will be able to pay a few years down the line.

Work on some realistic projections for your future income and outgoings, and make sure that you know which moves you can afford to make, and which you can’t. Otherwise, just sit tight and wait for what could be a rollercoaster few years for UK homeowners.