What's in store for house prices and interest rates in 2011?

Looking back on an eventful year, some of the statistics give the impression that not a lot has happened in 2010 – house prices have barely changed since a year ago, the number of mortgages being taken out is much the same as in 2009 and interest rates haven’t budged from their all-time low of 0.5 per cent (in fact the Bank of England has left rates unchanged for 21 months in a row). So what can we expect from 2011?  And what should borrowers be doing when it comes to their mortgage?  Well overall, things are forecast to be much the same in 2011 as they’ve been this year – certainly as far as house prices, mortgage lending and interest rates are concerned. House Prices Although the latest year-on-year house price figures show little change (Halifax and Nationwide’s November indices show an annual fall of 0.7 per cent and a rise of 0.4 per cent respectively),  2010 has seen some erratic movements in house prices from month to month (see below). 2010 house prices This volatility has mainly been due to the low number of housing transactions – less activity in the market means changes from one month to the next are more pronounced. Land Registry data show that there were around 600,000 completed house sales in 2009 – a drop of 50 per cent from the 1.2million seen in 2007 and according to the Council of Mortgage Lenders (CML), housing transactions are now at their lowest level since current records began in 1978. Latest figures for this year show an improvement on last year, although that’s likely to even out because late 2009 saw a boost in activity as the stamp duty holiday came to an end. Forecasts for next year are mixed, but what most people agree on is that price changes are likely to be modest, whether they be up or down.  The same can be said for the number of housing sales as people continue to be cautious during this period of spending cuts and public-sector job losses. Mortgages Key to the health of the housing market in 2011 will be the supply of mortgages.  Since the credit crunch, the total number of mortgage products available has plummeted – from around 16,000 in 2007 to around 3,000 in 2009.  The number of mortgages taken out has also dropped – loans for house purchase have roughly halved since 2007. Hardest hit have been those buyers unable to put down a big deposit, particularly first time buyers who are considered to be the life blood of the housing market.  Analysis from the CML suggests that between 2007 and 2010, as many as 800,000 potential first-time buyer households have effectively been frozen out of the market thanks to high house prices, tight lending conditions and a lack of mortgages available for those with a small deposit. The good news is that the number of mortgage deals available has gradually been rising this year – including first time buyer-friendly deals – and we expect that trend to continue into next year.  That said, mortgage funding will remain limited in 2011 and the mortgage market is forecast to be much the same size as it was this year. Interest rates UK inflation rose again in November according to the Office of National Statistics, prompting wider calls for a rise in interest rates.  The Consumer Prices Index (CPI) rose to 3.3 per cent, up from 3.2 per cent in October and 3.1 per cent in September thanks to higher costs of food, clothing and furniture. The Bank of England forecasts that, although inflation could stay above its 2 per cent target throughout 2011, it will start to fall back in 2012 without the need for a rate rise at the present time.   However, one member of the Bank’s rate-setting Committee thinks that rates need to rise now and we’ll have to see in the coming months whether the other members join him in calling for a rise. If inflation continues to climb then it will certainly increase the likelihood of a rate rise in 2011, but until then we’re not expecting any change in the Bank Rate. If you’re looking to buy a new home in 2011 then a good deposit will again be key to getting the best mortgage rate.  Deals will remain for those with deposits of 10 per cent or even 5 per cent, but rates will stay high and lenders’ criteria will still be strict.  We expect lenders will continue their tough stance on interest only borrowing that we’ve seen in the last few months. If you’re paying a variable rate at the moment and are considering remortgaging next year to a fixed rate deal, then you may well be debating when you should be making the switch.  Remember that if you wait until interest rates rise again, the cost of fixed rates will have already crept up so act sooner rather than later if you want to lock yourself into a good rate and protect your mortgage payments from future rate hikes.

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