Homebuyers 'borrowing and paying less

Homebuyers are taking advantage of a shaky property market as 2005 begins, putting less strain on their finances with lower mortgages, and reducing offers on properties, according to research published today.

The first report, carried out by property websites assertahome.com and propertyfinder.com, showed that buyers are aware that the market is now tilted in their favour. House hunters are, on average, offering 7.2% below the asking price on properties.

On the other side of the fence, sellers are starting to drop prices in an effort to pique interest. Half of sellers have cut the asking price for their home and are still prepared to entertain offers below that level, the research found.

Buyers are also borrowing lower multiples of their income and smaller proportions of a property's value. On average, buyers are taking out mortgages worth 56% of their new home's value, compared to 65% in June.

Across almost all income brackets, people buying property have reduced the extent to which they are prepared to stretch themselves, borrowing 4.4 times their household income today, compared with 4.7 times in May.

Jim Buckle, managing director of assertahome.com and propertyfinder.com, said: "Greater bargaining power means buyers can secure their new home for a lower multiple of their incomes.

"What's more, negative equity is unlikely to destabilise the market as borrowers are taking mortgages at a modest 56% of their new home's value and so will be relatively well protected if the market drops."

Confidence in the housing market hit a low point in November, when almost three quarters of people expected house price to fall in 2005. Buyers are now feeling slightly more upbeat, with around 66% of people expecting prices to fall this year, and 30% expecting them to rise.

But people are still holding out for bargains, hoping prices will drop by as much as 8% in the coming year, down slightly on November's prediction, which was closer to 10%.

Mr Buckle said: "After months of growing pessimism on the outlook for the market, house buyers and sellers ended the year on a slightly more optimistic note.

"Respondents still expect prices to fall, but are more sanguine than of late. It is too early to say whether this is the start of a new trend or merely a waft of seasonal good cheer, but increased activity on our websites does support the survey's findings.

"Consumers have apparently responded to signs of increasing inflationary pressures in the economy and so more of them believe another interest rate increase may be on the cards, even though they clearly believe that the housing market needs a rise in borrowing costs like a hole in the head."

Meanwhile, a report out today from the Centre for Economics and Business Research (CEBR) said the new year looks set to be the start of a five-year pause in the housing market - with the price of the average home in the United Kingdom in 2010 unlikely to be any higher than in 2005.

CEBR's forecast indicated that after ten consecutive years, the current run of house price increases would end this year, and will be followed by two years of falling property values.

Annual house price inflation will fall to 1.3% in 2005, from an estimated 18.8% in 2004, it predicted.

But in 2006 the price of the average house in the United Kingdom will fall by 6.0% and by 2.2%, in 2007.

The market should recover slowly thereafter - with a 1.5% rise in 2008 - but it may take until 2010, for property prices to return to their 2005 levels.

"Two of the reasons for the house price decline will be a double whammy of monetary and fiscal policy," said the centre's Mark Pragnell.

"First, the Bank of England's monetary policy committee is expected to push interest rates up further - peaking at 5.25% - 5.5% in the second half of 2005 - feeding through to lower house price inflation next year.

"Second, taxes are expected to rise by ?25bn in 2005 and ?24bn in 2006 and public expenditure growth is forecast to slow from 7.7% in 2004 to 5.5% per cent in 2006 as the government looks for a cure for its post-election budget deficit hangover.

He went on to say that there was an expectation that interest rates would be cut in 2006 and beyond, in an attempt to bolster consumers' confidence and stabilise the housing market.

"Despite our predictions that the market will tread water for up to five years, we remain among the most bullish of the independent commentators," he added.

"Although house prices will weaken in the medium term, we are not predicting a collapse. Fundamentally, we are not building houses quick enough to keep up with rising demand - in 2003, only 190,000 new homes were built and, although that was the highest total in six years, it is well below the average of 362,000 homes completed each year in the 1960s and the 314,000 annual average of the 1970s," Mr Pragnell said.

The price of the average home in Greater London is set to decline from a peak of ?243,000 in 2004 to ?228,000 in 2007, before rising again in 2008 and beyond, while in Scotland, average house prices will rise above the ?100,000 price mark for the first time ever next year, and then fall back to ?94,000 by 2007, the CEBR predicted.