Edinburgh in vanguard of house price fightback

BUT 6 per cent rise is not enough to convince all experts the worst is over, finds Teresa Hunter

EDINBURGH is leading the housing market recovery as the first area in the UK to experience a year-on-year house price rise.

The Edinburgh Solicitors' Property Centre (ESPC) market report for August, due shortly, is expected to show homes in the capital sold, on average, for more than 212,000, a rise of 6 per cent on last August's figure of 200,000.

The prices still lag behind a peak of 240,000 recorded early last summer, but have risen strongly since bottoming out at 198,000 earlier this year.

ESPC spokesman Neil Harrison said: "This is a major breakthrough for our market, to begin showing year-on-year increases again."

The news echoes last week's Nationwide survey which put property inflation across the UK at 1.6 per cent in August, the biggest monthly increase since December 2006.

Nationwide said house prices have grown 3.2 per cent so far this year but, despite this, across the UK values are languishing 2.7 per cent below their position a year ago. They remain 14.4 per cent lower than their peak of October 2007, whereas Edinburgh prices are roughly 12 per cent down on their peak figure.

Transactions in Scotland have also bounced back by 50 per cent according to the Council of Mortgage Lenders (CML), although they remain 39 per cent down on a year ago. CML last week reported property purchases leapt to 11,400 in the second quarter compared with 7,600 three months earlier.

All eyes are now on HBOS data, also due, which is expected to confirm the market is improving, though it will warn we may not be out of the woods yet.

Halifax economist Martin Ellis said: "We agree roughly with Nationwide on the average UK house price being around 160,000 and agree the market is stabilising.

"Where we might disagree is on the strength of the recovery."

At the other end of the scale, financial commentators at Capital Economics are much more pessimistic, and expect after a buoyant early autumn that prices will begin falling again until they reach at least 40 per cent below their peak.

Economist Ed Stansfield said: "It is hard to make the case that the latest rise in prices is any more than a temporary interruption in the longer downward trend."

So is the market over the worst? Or are recent improvements merely a pit stop on the journey to house-price hell?

Ellis was less gloomy but still more cautious than Stansfield. He said: "We remain in an uncertain world. Prices have come off the bottom. But I have some reservations about how sustainable the recent improvement will be."

Most commentators agree the recent pickup reflects a shortage of quality properties on the market.

Stansfield explained: "There are some cash buyers out there looking for bargains. Some people timed the market to perfection and sold at the peak, while others have been paid big bonuses by their companies to go away, yet have managed to get another job.

"They have gone shopping and are looking for bargains. September and October are the peak months for housing market activity, so I would expect it to continue for a bit. But it is all very artificial. Once these buyers have mopped up their bargains, what will happen next? Mortgage finance remains constrained. There are no first-time buyers, and without first-time buyers, there is no under-pinning. We are a long way from a normal market."

The most pessimistic cite the threats of rising unemployment, interest rates, and the unwinding of the Bank of England's quantitative easing policy as the booby-traps waiting to blow apart dreams of a happy ending. But the relationship between these factors and the property market is complex.

Most people believe, for example, that house prices fall when unemployment rises. But this is not confirmed by the data. Between 1983 and 1987 unemployment climbed to over 9 per cent, topping 10 per cent at around three million in 1984, 1985,1986 and 1987, yet house prices rose in the region of 10 per cent each year, and were even higher in the years most accurately blighted by redundancies, up 11 per cent in 1986, 15 per cent in 1987 and 23 per cent in 1988.

Unemployment was consistently lower than these levels during the recession of the 1990s, when house prices fell most years up to 1997. The only year the jobless count reached anywhere close to the highs of the mid-80s was 1993, when it briefly touched 2.9 million. Yet that was the only year during the slump that house prices actually rose, up 2 per cent.

The tumbling values of the 1990s were triggered by a tripling of interest rates, not by soaring unemployment.

In the current crisis, interest of 0.5 per cent have helped many families maintain their financial commitments and enabled some to reduce debts. The Bank of England has indicated its intention to maintain low borrowing charges for many months to come.

But at some stage they will rise, and from such low levels it is hard to argue that this new burden will not cause borrowers some renewed anxiety. Whether it triggers another downward spiral in prices leading to house-price Armageddon, however, is an entirely different matter.

Ellis added: "When the Bank of England decides it is time to put interest rates up again, it will be a sign that the economy is quite a bit healthier. So although borrowing might cost more, the risk of losing your job, or house prices falling will be lower. Strangely, higher interest rates could actually be a good sign for the market."

In such a scenario, the default risk will also reduce, in theory, allowing banks to cut their risk margins, which are at historically high levels.

Some borrowers, who are already paying well over base rate, might not see their costs increase hugely. Similarly, reversing the Bank of England's policy of quantitative easing may not be the icy curse many fear. Theoretically, it should withdraw money out of the system, yet the Bank of England's intimate tango with the financial sector has left the rest of us on the sidelines.

The banks have been given cash in exchange for various gilt-edged investments, in the hope they will pass it on as lending to stimulate the real economy.

However, much of this cash has been put back on deposit again at the Bank of England. As such, it has been largely an exercise in moving the deckchairs around. Reversing this process may have little more impact than creating yet another paper trail as money and assets move back and forth again in a reverse quickstep.

Affordability is more of an issue. The ratio of house prices to earnings has fallen to 4.6 from 5.7, but as Ellis commented: "As a benchmark, it is still high."

Stansfield added: "Houses are affordable if you have a big deposit and high earnings. But for normal, everyday folk on average earnings, a home on three or four times their wages is still out of reach."

This indicates further price falls cannot be ruled out. However, measuring affordability using the raw house-price/ earnings ratios in isolation does not allow for today's low interest rates. Factor these in, and the outlook starts to look healthier.

In conclusion, the patient is doing well, but is not out of danger yet.

Nationwide chief economist Martin Gahbauer is one of the most optimistic of housing market observers, yet he warns the recovery will not be smooth, and home buyers should expect a bumpy ride.

He said: "While low interest rates have played a part in reversing the downward pressure on house prices, they are unlikely to stay at the current level for ever. It is important to keep this in mind when interpreting recent price trends.

"When this is reversed along with various monetary and fiscal stimulus measures, the strong price increases of recent months would become difficult to sustain."

Kat and Iain's mortgage is shipshape at last

EDINBURGH couple Kat Heathcote and Iain MacNeil sold their home four years ago after setting up specialist maritime publishers Witherby Seamanship International.

They bought another house again recently after four years of renting, but their return to the housing market was anything but smooth.

Kat, of Colinton, said: "We sold our house to put the equity into the business, which grew well. It was such a success, that we reached the point last year where we felt we could buy again. We found the house of our dreams, but that coincided with the mortgage market completely collapsing. Cheltenham & Gloucester pulled their mortgage offer the day before we were due to sign the missives."

Kat and Iain were confident they would get a mortgage so signed anyway, and the vendors agreed they could rent until a completion date in June. "Getting a mortgage was much more difficult than we could have imagined," said Kat. "It was to be our lifetime family home, so we needed a big advance, and as our equity is tied up in the business, we only had a small deposit.

"We got so far down the road with a number of banks, but each time they pulled the offer. It was as if they were all deciding 'we no longer want to do this sort of thing'."

Finally, they approached Clydesdale Bank, and were impressed. "They didn't treat us like a set of numbers, but as individuals," said Kat. "They sat down with us and talked through our affairs and got to know us. After that they were happy to lend the money we needed."