Personal Finance: Nerves fray in property

THE 1.6 per cent fall in May house prices reported by Halifax Building Society last week took most people by surprise.

The property market had seemed to be picking up. February and March saw price rises. But the falls in April and May still leave house prices 2.5 per cent higher than at the beginning of the year - in fact, right back where they were a year ago.

However, the nerve of the housing economists who had been predicting a pick-up for 1994 has cracked.

Gary Marsh, of Halifax, who had hoped for 5 per cent rises over the year, and John Wriglesworth, of stockbrokers UBS, who had been expecting 7 per cent, have both halved their predictions. And even Steve Bell at Morgan Grenfell is worried that his 3 per cent forecast is too optimistic.

In fact prices did not actually fall by 1.6 per cent. They fell by 0.8 per cent, but Halifax takes into account seasonal variations: they should have been rising at this time of year, which magnifies the impact of a fall.

The tax rises in April pay packets have been blamed for the slowdown, but the fear was worse than the reality for most people.

Demand for property was brought forward by the tempting low fixed-rate deals around at the beginning of the year. People moved fast to catch them and were willing to forego haggling over house prices to secure the right mortgage. As the fixed rate rose, the impetus to move died away.

Unemployment prospects are not so bad now, but there are plenty of other theories to explain the languor. The long downturn in property prices means that thousands are unable to move because they have negative equity - their mortgages are larger than the value of their property. This diminishes both the demand for property and supply. But the psychological impact on others is more profound. No one wants to get stuck.

Valuers who caught a nasty chill when prices plummeted also get some blame. They risk nothing by being conservative - but expose themselves if their valuations turn out to be too high.

So some deals agreed by sellers and buyers have foundered when the building society has refused to lend enough.

In one case reported by Michael Jones, a past president of the National Association of Estate Agents, there were three buyers prepared to pay pounds 68,000 for a house that had no structural problems. But the valuer said it was worth pounds 62,000. One buyer said he didn't mind, and was able to fund the difference from his own pocket.

First-time buyers who have held back for several years as prices have fallen are now able to afford two-bedroomed houses and flats, making one-bed flats and studio apartments difficult to sell.

The top end of the market is more buoyant, with sufficient buyers ready to pounce on homes sold up by hard-pressed Lloyd's names.

In the middle range property is scarce. Families who have enough space and no need to move, are tending to stay put.

Some areas report reasonable trade at reasonable prices, while gloom has descended on others.

It hangs as much on psychology as on economics - it is not going to get better until more people believe the worst really is over.

LEEDS Building Society has announced it plans to join Woolwich, National & Provincial, Halifax and Nationwide by starting its own life company.

The sales staff will not be paid on commission, so they may not be quite so razor- keen to push endowment or pension policies onto every punter who comes through the door.

All the same, the muddle between buying a property, repaying the loan, saving up and buying protection in case of illness or death looks likely to last a long time.