Homes medicine may be too strong

THE Bank of England's interest rate medicine is taking effect on the housing market but is the cure worse than the disease? Some are beginning to wonder whether Mervyn King and his colleagues have gone too far.

The first problem when looking at the housing market is working out what is actually going on, given that there are so many different surveys - and they often seem to contradict one another.

What we can say is that the first half of 2004 was unusually busy for estate agents. Some 890,000 properties changed hands, 40% more than in the first six months of 2003 and the highest figure since the pre-boom days of 1988.

These levels of activity were accompanied by surging prices, which rose at around 20% annually.

Consumer expenditure also raced ahead, fuelled partly by homeowners remortgaging their properties so they could spend on the High Street.

All this spurred the usual scare stories of unrestrained boom leading to unavoidable bust: a stiff remedy was needed.

Four successive rises in interest rates by the Bank of England between November 2003 and June 2004 did seem to produce tentative signs that the patient was starting to respond.

The Royal Institute of Chartered Surveyors announced an easing of house price inflation in June. Property website Rightmove reported that asking prices of properties coming onto the market were starting to fall. Hometrack, which surveys estate agents, confirmed this trend, reporting its first fall in prices nationally in over a year.

But then first the Nationwide and then Halifax announced big jumps in house prices, of 2.1% and 1.3% - apparently casting doubt on earlier suggestions that the market was softening.

On top of that, new figures announced that British households were a trillion pounds in debt. The fifth rise in borrowing costs became inevitable this month.

Housing market indicators are confusing, as they show different things. The lenders' figures are inevitably out of date, because they are based on a month's worth of loan approvals that were agreed some weeks ago.

It means that the Halifax and Nationwide are now reporting the tail end of the booming market that prevailed until late June.

Even more out of date - though more comprehensive - is information from the Land Registry. Its secondquarter figures published last week showed average prices up 5% on the first three months.

More recent evidence of a slowdown comes from the National Association of Estate Agents, which says the balance of power has swung in favour of the buyer.

Purchasers, it says, now have a greater choice of property available, and are achieving better deals than in the heady days of March when they paid almost 98% of the asking price.

Rightmove goes further, detecting signs that asking prices show small, but sustained falls since July, reflecting a gradual recognition from sellers that they will need to shave prices as fewer purchasers chase more homes.

The housing market that has risen so relentlessly suddenly seems to have stopped in its tracks.

Last week Countrywide, the UK's biggest estate agent, announced a sharp fall in housing deals, which dropped 25% in July compared with last year.

Of course, the slowdown is partly seasonal. In a typical year, house moving is low on the agenda over the summer, although in 2003 post-Iraq war euphoria led to a brief blip over the summer. That Baghdad Bounce may partly explain why this July was so steeply down on the same month last year.

Fears of an all-out slump seem overdone. Borrowing costs and unemployment remain historically low, both factors that contribute to a sound property market.

Buoyed by the belief that interest rates are nearing their peaks, the housing market will probably cruise along for the rest of the year at a rather steadier rate.

Steering a course through the welter of data, the signs point to a calmer, slower market, but certainly no crash.