Economists downbeat despite housing market activity

Economists remained downbeat about the prospects for the housing market today despite evidence that activity had bounced back in January after stalling during December.

Nearly two-thirds of estate agents said the number of potential buyers registering with them during the first two weeks of January was higher than they would normally expect for the time of year, while 26% said levels were consistent with the average for the month.

At the same time, 45% of estate agents reported an increase in enquiries from people considering selling their home, according to the National Association of Estate Agents.

The rise in interest from potential buyers is in line with figures released earlier this week by property website Rightmove, which recorded its busiest day ever on January 11, with a record 28.3 million pages viewed.

The pick-up in interest comes after the Royal Institution of Chartered Surveyors (Rics) said the number of properties coming on to the market fell at its fastest rate for 18 months in December.

Enquiries from potential buyers also fell for the seventh consecutive month, with surveyors saying the shortage of mortgages, particularly for first-time buyers, was the biggest barrier to any improvement in the housing market.

Unsurprisingly, given the fall-off in activity, the majority of surveyors also continued to report falling house prices, with a balance of 39% saying values dropped rather than rose in December, although the figure was a slight improvement on the 44% who saw falls in November.

But there was a glimmer of hope in the Rics figures, with the number of completed sales during the three months to the end of December stabilising at an average of around 15 per chartered surveyor estate agent, although this is still well down on the long-run average of 27.

The shortage of sellers, which the Rightmove figures indicated had continued into the new year, could also be good news for the housing market, as it should go some way towards correcting the current mismatch between supply and demand which has been putting downward pressure on prices.

A shortage of homes for sale, combined with an increase in potential buyers, could help to moderate the current price falls.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "Clearly if the house supply-demand balance moves increasingly away from buyers towards sellers, it will provide significant support for house prices.

"Even so, we still consider that the fundamentals remain largely unfavourable for the housing market."

He added that speculation the Bank of England may raise interest rates in the first half of 2011 to counter above target and rising inflation, was further bad news for the housing market.

He said: "Any early interest rate hike would be likely to weigh down on prices - not just the rate rise itself but the impact on potential house buyers' psychology resulting from the fact that they would be facing rising interest rates."

He expects prices to fall by around 7% during 2011.

Ed Stansfield, chief property economist at Capital Economics, said: "Activity and house prices both softened in December.

"Although the drop in sales instructions was particularly striking, it does not necessarily follow that supply shortages will underpin house prices this year.

"We think that the labour market holds the key to the house price outlook. If, as we expect, unemployment rises significantly this year, we think that house prices could drop by 10%."

Meanwhile, figures from the Department for Communities and Local Government showed that house prices fell for the fourth time in five months during November, dropping by 0.1% to average £208,585.

Annual house price inflation also slowed for the sixth month, although it remained positive at 4%, its lowest level for a year.

The annual rate of growth worsened in all regions of the UK during November, apart from London, the East and the South West, with Scotland, Northern Ireland, the North East, North West and Yorkshire and Humberside all reporting year-on-year price falls.