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Wealth

House prices set to rise gradually

LONDON (Reuters) - House prices have probably bottomed but will only creep higher over the next couple of years as more properties come on the market and the economy makes a plodding return to growth, a Reuters poll showed.

A builder works at a Bovis homes housing development near Bolton, July 9, 2008. REUTERS/Phil Noble

Average house prices are seen ending this year 3.4 percent higher than where they started, but will rise just 1.8 percent next year and 2.2 percent in 2011, the poll of over 30 analysts found -- a far cry from double-digit growth during boom times.

The results in the poll conducted Nov 23-26 are generally more optimistic than predicted in the last Reuters UK housing market poll in September but comes after prices sank 16 percent in 2008.

Halifax said earlier this month house prices rose 1.2 percent in October, leaving the annual rate of decline at its smallest in 1-1/2 years as a lack of supply for sale and a burst of demand buoyed prices.

As house prices plummeted sellers deserted the market, sitting in their properties waiting for prices to rebound, and property website Rightmove said last week the number of new sellers remained thin, 30 percent below volumes seen in 2007.

“What recent dynamics have shown is that a shortage of supply set against rising demand tends to support prices and vice versa. We are a small island nation, with limited supply of homes,” said Alan Clarke at BNP Paribas.

Average home prices tripled in the ten years to the peak struck in 2007. But they crashed as a global financial crisis set in and mortgage lending evaporated, with medians showing prices will have fallen 18 percent from peak to trough.

Eighteen of 32 analysts said house prices had already stabilised, with six saying they would within a year. Eight said it would be a year or more before prices bottomed out.

In the United States economists say the worst housing market slump since the Great Depression has also nearly ended, wiping nearly a third off home values.

LENDING BUILDS UP

Banks tightened lending criteria dramatically in the midst of the financial crisis but mortgage approvals -- loans agreed but not yet made and a good early indicator of where house prices are headed -- rose to an 18-month high of 56,215 in September.

The poll found monthly mortgage approvals at 65,000 in six months and 70,000 in a year -- barely changed from the 60,000 and 73,000 predicted in September’s poll and well below the average of 104,000 seen in 2007.

Housebuilders Taylor Wimpey TW.L and Redrow RDW.L both gave buoyant trading updates earlier this month and Persimmon PSN.L said buyers were returning to the market as prices had stabilised and on the back of growing availability of mortgages.

The house price to earnings ratio -- a key affordability measure -- nudged up to 4.54 in October from 4.49 in September but down on a peak of 5.84 one a year ago, according to figures from the Halifax survey. But that ratio is still above the 4.0 ratio that economists said was sustainable over the long-term.

“We will not be convinced that the market has reached something close to fair value until the ratio has returned to somewhere around 4,” said Peter Dixon at Commerzbank.

Other economists agree that house prices were slightly overvalued, giving a median rating of 6 in the poll, where 10 was extremely overvalued and one extremely undervalued compared to fundamentals. That is the same finding as the September poll.

The Bank of England has chopped a whopping 450 basis points from rates since last October, putting them at a record low of just 0.5 percent, dramatically reducing mortgage payments for homeowners.

With interest rates at rock bottom the only way is up, although economists polled by Reuters say it will be the second half of next year before the BoE begins to raise them again.

Britain entered its longest recession on record at the end of last year and is expected to shrink by 4.7 percent this year. Economists say it is likely to have begun growing again in the current quarter.

Polling by Bangalore Polling Unit; Editing by Andy Bruce

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