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Can the ‘Irrational Rally’ of House PricesContinue in 2010?



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Dubbed the ‘irrational rally’ by economists, everyone is wondering if the rise in house prices can continue this year.  2009 was very much a year of two halves for the property market: at the beginning of the year house prices were in free fall.  Enter cash-rich investors looking to snap up bargains and the market was 5.9% up at the end of the year, even though it was down 17.6% in February (Nationwide figures).  Halifax showed a similar story with prices swinging from a 17.7% fall in April to a 1.1% rise for the year as a whole; although, if you use Halifax’s data to compare December 2008 to December 2009, you have a rise of 5.6%.


The brains behind the surveys are all in agreement that the market has been fuelled by a lack of supply with many would-be vendors holding back, hoping to catch the next boom time. The Royal Institute of Chartered Surveyors (RICS) has consistently cited a lack of property coming to market and the figures have been further skewed by cash-rich investors buying expensive property. With interest rates at rock bottom, homebuyers have been able to get good deals on lending (particularly if they have a large deposit of around 25%) but with small returns on savings accounts, investors have been forced to look elsewhere; hence the desire to invest in property.


Are the Cracks Starting to Show?


According to RICS, house price inflation slowed somewhat in December.  Its statistics said that 30% more of its surveyors reported rising house prices than those who reported falls.  Although that still sounds quite positive, that figure is down from 35% in November.  Although this could be put down to seasonal factors - Christmas is not a traditionally busy time in the housing market, the Institute suggested that the gap between supply and demand had narrowed with more property coming to market.


As is often the case with UK housing data, the latest RICS statistics showed major geographic discrepancies in the behaviour of house prices.  Valuations are going up in London, the South East, South West and East Anglia but are falling in the North and West Midlands.  Although there was more unsold property on agents’ books in December, RICS remain positive for the New Year.  To quote spokesman, Jeremy Leaf: “It is likely that the new year will see more interest and activity in the market as those who held back start to market their property with renewed optimism.”


One factor that could sound the death knoll for the latest recovery is the report by RICS that says new instructions to sell are coming at their fastest rate since the property boom time of May 2007, whilst buyer enquiries are rising at their slowest level since January 2009.  The race to sell seems to have been sparked by a combination of rising house prices and the squeeze of the economic recession on homeowners.