December 1, 2006 | posted by Michael Baxter in IABN |

At face value it is a puzzle. If there is one thing all the various reports into the UK housing market published in the last few days have in common, it is that they paint a picture of relentless rises. Traditionally a strong property market works hand in hand with a buoyant High Street. The very factors that made shoppers feel flushed with enough money to go out and spend, also meant they felt prosperous enough to spend on the housing ladder too. Meanwhile, as house prices rise, homeowners feel richer, and are more inclined to spend. Yet, this time, while house prices have been rising, the High Street seems to be moving back into the doldrums. There is, however, an explanation.

This week has seen data from the Bank of England telling us mortgage borrowing is up, - a three year high in fact, while Hometrack and Nationwide both tell a tale of an increase in the rate at which house prices are rising.

Hometrack was first out of the blocks, having prices up 0.6 percent in November, rising to an annualised rate of 5.3 percent. It has not reported a higher monthly rise than that, since April 2004.

Meanwhile, Nationwide recorded a 1.4 percent jump in November, the biggest rise since July 2004, and has the annual rate at 9.6 percent. According to the building society, the typical home is now £15,046 more expensive than a year ago, meaning that your average homeowner could have lain in bed for the day, and still be £41 better off the next morning.

But the High street is all in a dither. Earlier in the week, we brought news from retail analyst, Richard Ratner, of Seymour Pierce stockbrokers, that “Christmas 2006 will be worse than 2005, and could be as difficult as, or even softer than 2004, which was the worst for 23 years.” Then yesterday, the CBI released its latest Distributive Trade Survey. This is the one where the employers organisation asks retail members whether sales are up or down on a year ago. The difference in the percentage of retailers saying sales are up, and those saying they are down forms the index. In November it scored minus nine, the weakest level since March.

So why are house prices rising when the High Street is falling? Actually, there are two explanations.

Price, as you know is determined by demand and supply. On the High Street demand is down, because consumers are reining in their spending.

But in the property market, supply is so low that even overstretched buyers have no choice but to fork out. The Nationwide said: “Stocks of properties for sale are at a two-year low, leaving buyers chasing relatively few properties. With instructions still falling, there is no immediate improvement in supply conditions in sight.” Hometrack, also slotted its pennies worth into the debate, with its director of research, Richard Donnell,

saying: “Set against a background of dwindling supply, house prices have continued to rise, a trend that has now spread beyond London and the south-east.”

The other factor that is pushing up house prices is Buy to Let investing. In the short term at least, you would expect little correlation between the buoyancy of Buy to Let and the High Street.

But it’s not all bullish speak. The Nationwide made two warnings. First it said that: “If confidence in the market evaporates, the expected return on buying could fall sharply as there would be less expected capital gain.” This could rapidly affect the buy-to-let sector which has been rising in importance in the UK market.” Nationwide quoted figures from the Association of Letting Landlords, which based on the assumption of house prices growth of 8.6 percent, estimates “a 5 year geared investment of around 22%.” But it said: “If expected gains were to fall to around the level of earnings growth, with everything else staying the same, the total returns halve. This presents quite a different investment proposition.”

The Nationwide’s Group Economist, Fionnuala Earley, also warned that “affordability must eventually bite, which limits the prospects for rapid nominal house price gains to continue far into the future. However, the likelihood and size of any fall will depend on how overvalued the market already is. In June we estimated that there was a modest level of overvaluation, based on the view that much of the fast run-up in house prices over the past decade can be explained by fundamental economic drivers such as supply shortages, growth in incomes and lower interest rates, rather than a large speculative bubble.”