May be at least a stall in OBR house price forecast - David Alexander

After almost four decades of professional involvement in the residential sector, I have no doubt property is the best hedge of all against inflation. Some see that as a good thing while others do not but bald statistics (i.e. those not geared to promote a particular special interest) do not lie.

David Alexander is managing director of DJ Alexander

At the same time, however, I know this “hedge” does not always work in a continuous upward trajectory; from time to time values take a step backward before moving two steps forward.

Which is why I found last week’s forecast by the Office of Budget Responsibility (OBR) that house prices in Scotland will rise by 5.7 per cent over a 12-month period covering 2021/22, of particular interest. I have no reason to question the veracity of this projection – the OBR will, after all, have access to data beyond my reach – but it is, after all, still a forecast not an absolute statement of fact and there are several reasons why things may turn out differently.

True, the property “mini boom” which started in Scotland in the spring has gone on longer than many anticipated but the contents of last month’s Budget may prove to have been a catalyst, one of whose effects will be to slow the housing market, albeit for a temporary period and for how long is anyone’s guess.

Rishi Sunak, Chancellor of the Exchequer. (Photo by Dan Kitwood/Getty Images)

The Chancellor, Rishi Sunak, won praise for his Budget sweeteners like lower taxes on sparkling wine and beer and on air passenger duty for internal UK flights. But these were no more than the icing on what underneath was a very tough-to-swallow cake, especially for middle-income households.

The reaction from most respected think tanks to the Budget was that a combination of higher taxes and rising prices will produce a cut in real incomes for many working families over the next couple of years (for example the brewing companies have already stated that the tax cut – which should have produced a 3p reduction in the price of a pint – will be swallowed up in higher costs). And what will Kate Forbes, the Holyrood business secretary, have in store for Scottish households when the next round of council tax rates are announced next year? Let’s just say I doubt if any of us will end up paying less.

Anyone who does a weekly shop will be aware how much the cost of foodstuffs is rising, which is quite apart from further anticipated increases in the cost of household space and water heating, both in the short term due to extra demand as economies recover but also in the longer term as it becomes compulsory to replace gas boilers with greener products.

These factors are enough in themselves to have an effect on the affordability of housing but to compound matters all the indices point to an end to ultra-cheap mortgage deals. Twenty years ago the bank base rate dropped below five per cent and in the intervening period has fallen to 0.10 per cent. To those whose homes were mortgaged during the 1970s and 80s (when the rate was regularly in double figures) today’s rate is nothing less than astonishing. Historically, therefore, an increase to 0.75 per cent would seem extremely modest yet according to one calculation this could mean paying almost £1,000 a year more for someone with a £250,000 mortgage.

Another factor to consider is just how long the “race for space” will affect the market. Undoubtedly demand has been accelerated by people desperately wanting to swop flats for houses with gardens or houses with small gardens for houses with larger ones. But this may decelerate sharply if the virus continues to ward off covid (or its worst effects) and eventually becomes a “manageable” condition just like flu.

If the OBR believes that house prices will rise by 5.7 per cent despite these inhibitors then all well and good but I wouldn’t discount a step backward – or at least a stall – before another two steps forward.

David Alexander is managing director of DJ Alexander