UK property prices ended 2010 up 3.8% year on year but set to stall in 2011

Residential property prices in the UK increased by 0.5% in December from the previous month taking the average price to £208,148, according to the latest figures from the UK government.

It means prices saw an annual jump of 3.8% but average house prices were 0.4% lower over the quarter to December, compared to a quarterly increase of 0.2% in the third quarter of 2010.

There were regional variations with average prices in England up 4.1%, up 4.3% in Wales, up 1.8% in Scotland and down 16.1% in Northern Ireland.

Prices paid by first time buyers were 1.4% higher on average than a year earlier whilst prices paid by former owner occupiers increased by 4.7%. Prices for new properties were 7.6% higher on average than a year earlier whilst prices for pre-owned dwellings increased by 3.5%.

But the property market is set to stall in 2011, according to the latest forecast from the Centre for Economics and Business Research. After recording year on year growth of 6.4% in 2010, the house prices were 1.7% lower compared to last year, it says.

Anaemic growth in disposable incomes and higher unemployment throughout 2011 will cause house prices to fall, particularly in regions most vulnerable to public sector cuts. However, affordability for first time buyers will reach an eight year high in 2011 as mortgage interest rates remain at record lows and house price growth weakens.

The forecast adds that the ongoing fragility of the recovery will also dampen demand for mortgage lending, as households continue to repay their debts and rebuild their savings.

House price growth will resume at a slow pace from 2012 onwards as banks’ lending criteria are relaxed further and consumer confidence recovers from a year of rising inflation and uncertain employment prospects.

‘We expect to see household earning power suffer over the next year or so, due to higher inflation and weaker employment prospects as the economic recovery remains fragile. Lower consumer confidence throughout the year is expected to rein in demand for mortgages, which will average around 50,000 per month, still around 50% lower than pre credit crunch levels,’ said Shehan Mohamed, the report’s author and economist at Cebr.

‘The Bank of England's loose monetary policy stance in the face of the impending public sector cuts will keep mortgage rates anchored. Indeed, affordability for first-time buyers will reach an eight-year high this year, with first time buyers spending an average of 24.2% of their disposable incomes on mortgage payments,’ he added.

According to Douglas McWilliams, chief executive of Cebr, any growth will be tentative in the coming years, given that household incomes are being squeezed and banks are still wary of lending. ‘There is currently significant uncertainty in the market caused by the Government's spending cuts and a choppy recovery, which has greatly impacted transaction levels,’ he said.