UK house prices: UK house buyers are still swimming in shark-infested waters. A recovery since February last year has left average house prices hovering only 10 per cent below their October 2007 peak. But with the new coalition government’s June budget approaching, fresh dangers lie in wait. The housing market is still in mixed health. Although the trend has been up, prices fell in February and April, according to the Halifax building society. Affluent parts of London have seen values fully recover as resilient bank bonuses and wealthy Greeks fleeing domestic troubles have caused strong demand.
In other areas, prices have barely budged. The latest indicators look negative. New buyer enquiries strongly outnumbered new sellers’ last Autumn, according to RICS. That trend has now eased, and the latest mortgage approval figures showing a quarterly drop of 18 per cent. Even if demand comes back strongly, fresh credit will remain scarce as UK banks’ face a £300 billion funding gap when the government withdraws liquidity support measures next year.
The emergency budget could make things worse. Proposals to harmonise capital gains tax with income tax could lift the top rate to 40 per cent or more and hit owners of second homes hard. A property worth £100,000 in 1985 would now fetch £490,617, according to the Nationwide building society. The changes could create a CGT bill of £152,207, against £68,493 currently.
The danger is that the Tory-dominated coalition government caves into pressure from its wealthier voters and allows a grace period. That could prompt a rush by the wealthy to sell second homes and of buy-to-let properties, which account for 10 per cent of UK mortgages.
Even if the coalition avoids this banana skin, it will have to cut public spending sharply to regain the faith of global bond markets. Many over-leveraged borrowers have avoided default only because interest rates are so low. If they lose their jobs — or if sterling weakens and inflation mounts elsewhere in the economy, pushing up rates — there could be a wave of forced selling. Supply shortages may continue to keep London’s hotspots simmering, although a weakening euro — sapping the confidence of foreign buyers — won’t help here either. The recent falls in UK house prices could yet continue.