The housing market bubble will not burst in 2004 and prices will continue to rise, although by only half as much as in 2003, according to RICS (Royal Institution of Chartered Surveyors) in its economic forecast of the UK residential property market 2004.

Looking forward

RICS forecasts a 6 percent increase in house prices in 2004, based on the government’s new monthly house price index. This figure is half the 11 percent rise that RICS expected for 2003. The slowdown will be the result of a gradual rise in interest rates.

Strong regional variations are likely to continue, with the London market and other southern regions’ price increases remaining subdued at 5 percent, and northern regions continuing to rise by over 10 percent, significantly less than in 2003.

However, a lack of availability of properties coming onto the market will exert upward pressure on prices in the first half of 2004. Demand for houses is likely to remain high due to the buoyant economy.

RICS chief economist, Milan Khatri, says, “The question on everyone’s lips is will the housing market crash next year – our response is no but, as always, this will depend on the continuing strength of the overall economy and low interest rates.”

Looking back

RICS forecast an 11 percent increase in house prices in 2003. This forecast was the closest estimate to the actual figure recorded of 15 percent.

The most significant developments in the residential property market in 2003 have been the surge in prices in the northern regions of England, and the spread of investment buying of property from London and the South East to the rest of the country.

According to the government's new monthly house price index, prices in the North East rose by 27 percent for the year to October and 22 percent in Yorkshire and Humberside. This contrasts with London where prices only rose by 6 percent.

Falling interest rates have been a major factor boosting house prices nationally, helping the growth in buy-to-let activity, but this has also meant that first-time buyers have found it difficult to get into the market.

Chartered surveyor estate agents estimate that first-time buyers accounted for 16 percent of the market in August 2003 compared to 18 percent in October 2000. Over the same period, the percentage of sales to investment buyers rose from 8 percent in October 2000, to 13 percent by August 2003.

House prices - the facts:

• House prices have doubled since 1995.
• In 2002 house prices rose on average across the country by a staggering 25 percent, but in 2003 price rises slowed down to 11 percent.
• The ratio of house prices to incomes reached 6.1 in Q3 of 2003, the highest level ever recorded. The two previous peaks in the early 1970s and late 1980s housing market booms proved unsustainable, resulting in house prices falling in real terms (adjusted for inflation) by 30-35 percent.