Housing market: Gloom to linger over property market

That was the verdict of an end-of-year Smart Money survey sampling expert views on issues including house prices, lending, repossessions, regulation and home reports.

The results were mixed, but the prevailing mood was one of uncertainty and predictions of a housing market recovery were conspicuous only by their absence.

The outlook was largely in line with the 2011 forecast published this week by the Council of Mortgage Lenders (CML), which said lending could reach its lowest level in three decades next year as sales drop and uncertainty reigns in the housing market.

But will it really be that bad? The 15 solicitors, surveyors, estate agents, letting agents and trade bodies that took part in our survey had plenty to say when we asked for their views on the outlook for next year.

1 – House prices

Few economists expect the recent slip in house prices to be arrested over the coming year, with some predicting stagnation and others forecasting falls of up to 10 per cent. Our experts were marginally more upbeat. Those expecting house price falls were cancelled out by the number expecting them to rise, although the latter were only cautiously optimistic.

The caveat cited by all respondents was the economic outlook, most notably the potential for widespread job cuts to hit the housing market.

David Morrans, of Honour Financial Planning in Edinburgh, said: "Prices will go down, but by under 10 per cent, because of austerity measures, increased VAT, reduced earnings and prospective buyers anticipating that prices will fall further."

The response from the Royal Institution of Chartered Surveyors (Rics) Scotland was more typical, forecasting static prices with the potential for falls of around 5 per cent in areas with an over-supply of stock.

But Richard Murray, of letting agents Murray & Currie, claimed prices would remain static until 2014 due to a lack of lending and economic activity.

"Primarily driven by lack of economic activity but also reflective of the health of our principal lending institutions, we are unable to see any substantial emerging stimulus for the property market for perhaps as long as four years," said Murray.

However David Marshall, of Edinburgh Solicitors' Property Centre (ESPC), predicted that while prices would continue falling back to the level of early 2010, they would level off later in the year.

2 – First-time buyers

The lending restrictions freezing first-time buyers out of the market continue to depress activity levels, with demand dropping and a growing number of sellers subsequently reducing their prices.

Our respondents all shared the view that unless lenders make more finance available to first-time buyers, the outlook for first-timers will darken in 2011.

Sandy Burnett, partner at Murray Beith Murray, said the lot of the first-time buyer would only improve if the government put pressure on lenders to help them. "There is little chance of the housing market recovering without the first-time buyer market improving," he added.

Jonathan Fair, chief executive of Homes for Scotland, agreed that there would be no change unless funding levels increase. "Facing the major constraint of having to find deposits of up to 25 per cent, it is little wonder the average age of an unassisted first-time buyer is now 37," said Fair.

But Matthew Gray, at Pagan Osborne, was more optimistic: "There is evidence that first-time buyers are looking at creative ways in which to purchase, such as shared equity and joint purchases. These will become more fashionable in 2011 and could spark the return of the first-time buyer sector, albeit at a vastly lower level than before," said Gray.

3 – Interest rates

Interest rates will remain at the current record low of 0.5 per cent throughout 2011, according to two thirds of respondents, with the remainder predicting a 1 per cent increase at the most.

David Marshall at ESPC was in line with the consensus, suggesting that if there is any rise in interest rates, it won't come until later in the year.

"However there is still some uncertainty about the balance of risk in the economy and this is reflected by the range of opinions amongst the monetary policy committee, so buyers should certainly 'stress test' their mortgage to see how their repayments would be affected by a change in interest rates," said Marshall.

Richard Murray believes inflation may make a small increase inevitable.

"A sharp increase is out of the question though, so my prediction is that in the second half of 2011 we will be seeing a marginal increase of perhaps 0.25 per cent or even 0.5 per cent," he revealed.

Tony Perriam at Rettie said a 1 per cent increase is realistic, albeit not until 2012 is almost upon us, while Gray predicted a slow increase over the next year by around 0.5 per cent.

4 – Repossessions

If interest rates remain low the likelihood of a significant spike in repossessions, after a lull this year, is slim. The two are inextricably linked, with low interest rates helping stretched homeowners maintain repayments at a time of rising unemployment and low wage inflation.

Most respondents agree with the CML forecast of a modest rise in repossessions in 2011, including Rics Scotland and Tony Perriam at Rettie, who both pointed to the effect of a likely income squeeze on households.

"Arrears will rise with curbs on spending power due to the VAT increase, salary freezes and interest rate rises, but it will be difficult to monitor," said Perriam.

However Rics said the government's decision to retain the existing eligibility criteria for mortgage interest support would help minimise repossessions. And Scott Brown, estate agency partner at Warners, said lenders were mostly adhering to the government's request to ensure repossessions are the absolute last resort.

"Only those who genuinely make no effort to pay their loans will be repossessed therefore I do not see the numbers of repossessions rising in 2011 – particularly for those lenders where the taxpayer has a stake," said Brown.

5 – Property marketing

Declining house prices have driven a shift away from the "offers over" method towards "offers around" and fixed prices. And with prices unlikely to rebound in 2011, the consensus was that "offers over" would be prevalent only in high demand locations.

Robert Carroll, managing director of MOV8 Real Estate in Edinburgh, said: "Otherwise it is a bad idea because buyers don't like it.

"Property sellers would be well advised to do everything to make their properties as attractive to buyers given that it's a buyer's market."

Marshall at ESPC agreed, reporting a shift towards marketing properties at "offers around".

He said: "If you set the asking price too high you will deter potential buyers when interest is highest, so you have to lower your asking price and ultimately accept a lower offer."