House prices 'up by the end of the year'

Lloyds, Britain’s biggest lender, has predicted house prices have only 6% further to fall and could rise by the end of the year.

The forecast comes as commentators grow increasingly optimistic about the outlook for the UK economy and stock market, with the FTSE 100 now showing a gain for the year. The index closed at 4,462 on Friday, above 2009’s starting level of 4,434 and 27% higher than its March low.

Lloyds, which has a 30% share of the mortgage market, previously thought house prices would fall 15% this year — or a drop of about 34% from the August 2007 peak price of £199,612.

However, it now believes this year’s decline is likely to be closer to 10% — or 28% from the peak to a trough — with prices probably bottoming within months. Prices are already down 3.8% this year, according to the Halifax house price index.

Stephen Noakes at Lloyds said: “I think we will only see about 10% to 12% falls this year. For the first time people are thinking that house prices will increase over the next 12 months.”

Ray Boulger, of John Charcol, the broker, believes house prices have only 8% left to fall before bottoming in the autumn and then increasing 3% by the end of the year.

Nationwide, meanwhile, forecasts a 25% peak-to-trough fall. Its index shows prices already down 18.4%, leaving about 6% to go.

Lloyds last week slashed the cost of deals for people who want to get into the property market as price falls have slowed.

However, other lenders are expected to raise fixed rates within days, following a sharp increase in funding costs last week. This reflected market predictions that interest rates will rise by the end of the year to curb inflation. We answer your questions.

Why are commentators seeing green shoots?

House prices are nearly back at levels where first-time buyers can return to the market. Halifax said last week that house prices compared to earnings — a key measure of affordability — had fallen to its lowest level since 2002.

At the peak in July 2007, the average house was 5.84 times earnings, but that figure is now just 4.26 — although still above the long-term average of 4.

Boulger said: “While we shouldn’t overlook the consequences of further redundancies and sharp rises in interest rates round the corner, there’s been a marked change of mood.”

Are there better mortgage deals around?

Lenders have also been tentatively reducing the cost of home loans for those with small deposits. Last week, Lloyds cut rates by up to 0.40 percentage points for those looking to purchase property. Its two-year fix for those with a 15% deposit was cut by by 10 points — it is now 5.79% — while its five-year fix for those with a 25% deposit has come down 0.40 points to 4.89%.

So is there a rush to fix?

Borrowers will have to act fast to get a good deal. Swap rates, which are used to price fixed-rate deals, rose 0.13 points last week to 2.17% for two-year deals, and 0.25 points to 3.36% for five-year deals.

Royal Bank of Scotland also raised rates last week by up to 0.70 points — particularly for those with less than 20% deposit.

Building societies Britannia and Yorkshire are also expected to raise rates by up to 0.3 points on some fixed-rate deals within days.