5 questions

1

The slowdown in headline house price growth that started a year ago has continued over the summer months with year-on-year growth now at its lowest level since the mid 1990s. The slowdown in the rate of growth is expected to continue over the remainder of 2005, with values likely to be up by just 2% over the year to December 2005. The catalyst for the slowdown has been higher interest rates and weaker market sentiment which has resulted in lower levels of transactions as well as slower growth in house prices.

2

Since the introduction of PPG3 in 1998 the proportion of private housing output in the form of flats has increased threefold, from 15% to 45%, and with 50% a likely reality in the year ahead. The impact on the housing market has been profound as this new stock has resulted in the supply of privately owned flats growing by around 30% in each region over the past three years. Investors have bought much of this new stock but low yields and a more uncertain outlook for capital growth has seen a slowdown in sales rates on many schemes. Most developers have a healthy forward sales position to fall back on. In the short term they will be focused on selling committed supply through the use of sales incentives and adjustments to selling prices.

3

Longer term the issue is whether the move to more normal trading conditions – that is to say, slower sales rates and more price-sensitive buyers – will have adversely affected the viability of city centre sites earmarked for housing. This is especially important against a background of planners adding to development costs through greater Section 106 requirements. We could well see the supply of new housing in our city centres start to moderate over the next few years and this will act as a support to prices.

4

After a decade of booming house prices, the housing market is set for a period of low, single-digit growth over the next few years. Buyers are facing a much slower expansion in buying power and the key factor is the outlook for interest rates. The recent cut in rates is likely to boost market confidence more than prices

and will support the recent recovery in levels of market activity. Our current forecast is that average house prices are likely to remain static over 2006 with small price falls in some regions being offset by small price rises in others.

5

The prospects for affordable housing provision are a function of government spending and the delivery of housing as part of Section 106 agreements. If the slowdown in the market impacts on levels of housing output or the viability of schemes, then there could well be implications for the delivery of affordable housing via Section 106 agreements.