Special report: House price future

EVERY TIME Paris sneezes, Europe catches a cold, according to an old saying. In Britain, we now have a new version - every time Mervyn King so much as sniffs, the future value of your house gets the shakes.

Every decision by the Bank of England Governor, and even every word he says, has an impact on sales in the property market. But it has an even bigger impact on City attempts to predict the future value of houses.

This spring and summer, King has rocked the homebuyers with three interest rate rises. However, his words have been equally powerful, especially his warning on 15 June that house prices are now 'well above what most people would regard as sustainable'.

How powerful have they been? Well, one measure is the market in future house prices run by City bookmaker IG Index. This quotes prices for the average home in the UK, London and the regions for every quarter from now until September 2005.

If IG's prices are right - and this is a big 'if' - King's words and deeds have knocked £18,300 off the theoretical London house price in March next year.

This figure is calculated as follows: in late April, the property price futures quoted by IG were implying that average London house prices would rise steadily to £257,900 by March 2005.

By yesterday, IG's implied average price for March 2005 had fallen to £239,600, a full £18,300 below that, following a torrent of bearish bets by its customers.

The market had been projecting a tidy rise in average London house prices in the next seven months; now it is projecting a fall. The longer outlook is even worse - IG's futures prices suggest a further £11,100 fall in average London property values between March and September next year, to £228,500.

Both IG and housing professionals say that the Governor's words on 15 June had a particularly marked effect on the mood - and that their effect is still being felt.

Giles Wilkes, head of financial trading at IG, says: 'After King's statement, we revised down our prices but, according to our clients, we did not revise them down enough. We have seen pretty much one-way business since then.'

At present IG has 800 open bets on property prices. Because sentiment has been so lopsided, the bookie has been restricting the size of bets it is taking.

Estate agents confirm that King's statement sent a cold wind up buyer's vests and gave some an excuse to take their money off the table.

Marc Goldberg, London regional sales director of Hamptons International, says: 'The speech had a very big impact. It created a short-term freeze in the London sector. A number of deals fell through.'

Whether the housing market is a bubble about to burst has become a preoccupation with many of Britain's short-term traders and speculators.

The trouble is that pessimists have been wrong several times over the past three years. In February 2003, just before the Iraq war started, IG's house-price spreads were signalling a 10% fall in London prices in the year ahead. In fact, the Halifax index for London rose 9.4% in the year to March 2004.

Could the pessimists be right this time? Speculators remain more bearish about property in London than about property nationally. For house prices in the UK as a whole, IG's spreads are implying only a modest fall, with the average dropping from £159,700 in June 2004, via £162,800 next March, to £157,400 by September 2005.

Wilkes says the prices set by IG's customers imply an unusually sharp change of direction in London house prices. 'The sort of move our clients are suggesting will happen would be unique in the history of the housing market to date - a rapid slowdown in house prices with no economic distress in the economy as a whole to cause it,' he says.

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