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Can UK house prices really jump another 50% by 2011?

The demise of Home Information Packs has been largely welcomed by the estate agent industry. But we'd suggest that there's still plenty of reasons to be worried about the UK property market.

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The Government is currently pulling more breakneck U-turns than a teenage joyrider in a gravel car-park.

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The latest is on Home Information Packs (Hips). A more detailed description follows, but essentially Hips were meant to improve the transparency and speed of property transactions. However, they now look set to be kicked into the long grass along with other half-baked Government ideas like ID cards.

We can't say we're disappointed. We have no doubt that the process of buying and selling property could be improved, but Government interference usually means more expense and hassle for all involved.

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Many estate agents - though not all - are also pleased at the retreat. But we've got bad news for them - UK house prices are headed lower, Hips or no...

The original idea behind Home Information Packs was to speed up the home-selling process, and make sure fewer deals fell through.

The seller-funded packs would cost around £600 to £1,000 (depending on who you ask). They would contain all the legal data required, as well as a survey prepared by specially trained surveyors called Home Inspectors. This would - in theory - remove the need for buyers to get their own surveys done and allow the transaction to take place pretty much as soon as the two parties had agreed on a price.

The packs were due to be introduced in July 2007, and several estate agencies most prominently, property website Rightmove had invested a large chunk of money in gearing up to sell Hips.

So it was something of a shock for Rightmove and its shareholders when the Government effectively pulled the plug on Hips by deciding that the pivotal component the survey would be voluntary. Rightmove was forced to issue a profit warning, and shares tumbled 20% to 280.75p.

It turns out that there won't be enough Home Inspectors ready for the June 2007 deadline. Unfortunately for those who have already shelled out as much as £8,000 in training costs, it looks like their services now won't be in half as much demand as they had hoped.

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Parts of the pack will still be required, such as the legal documents. But many now expect the whole idea to be dumped before next year.

Anti-Hip protestors like TV's Kirsty Allsop had decried the packs, claiming that housing transactions would grind to a standstill.

We're sure she'll be glad to see the back of Hips. But there are still plenty of good reasons to worry about the housing market.

Cheltenham & Gloucester reckon that a single quarter-point interest rate hike (which we could well see by September) would push housing affordability to its lowest since 1991. C&G say interest rates at 4.75% would mean the average householder spending 49.8% of their take-home pay on mortgage interest repayments alone.

Meanwhile a survey from Propertyfinder.com shows that UK homeowners are six times more likely to believe their area is likely to beat the national housing market than trail behind.

But as director Nicholas Leeming points out: "Prices can't beat the market everywhere!"

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This kind of delusion shows just how pervasive the 'property prices only go up' mentality is. When most people believe prices can only rise, that's usually the point that they begin to fall - have we forgotten the tech bubble so quickly?

But aren't house prices set to soar another 50% over the next six years? That was the claim of a headline-grabbing report from Oxford Economic Forecasting (OEF) earlier this week, which said the average house price would top £300,000 by 2011.

Well, let's see. The OEF report was conducted for the National Housing Federation (NHF), the trade body for housing associations, who are currently campaigning to get more money from the Government to build and refurbish homes for low-cost rental and ownership. So the OEF's finding that fewer and fewer people will be able to buy houses in the future is pretty convenient for the NHF.

It seems The Guardian thought so too so it ran the figures past an economist. It reported: "Steve Wilcox, professor of housing policy at York University, said the OEF's forecasts appeared to be robust if the underlying economic projection was sound."

So what was the underlying projection? Well, for a start it assumes that interest rates average 4.5% for the six years to 2012. Given that they're sitting at 4.5% right now and look set to rise, that seems optimistic to us.

The OEF also says growth in wages will be 4.1% to 4.4% over the same period, which would mean house prices stretching to a staggering nine and a half times the average salary. David Orr, the NHF's chief executive concluded: "Over the next six years we'll see home ownership being pushed further out of the reach of middle earners and even those on relatively high incomes."

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But that begs the question who will be buying all these houses? If people can't afford mortgage repayments, they won't be able to afford the rents needed to cover their landlord's mortgage repayments either. So unless buy-to-let investors remain uncommonly stupid (not to mention solvent) and keep subsidising their tenants' rents for the next six years, we just don't see how affordability could fall that far without a crash in the market.

Perhaps we're just not using the right underlying economic projections.

Turning to the stock markets...

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The FTSE 100 jumped 96 points to 5,778 as a dovish speech from Federal Reserve chief Ben Bernanke eased the market's fears over further interest rate hikes. Mineres were among the main risers, with Xstrata up 5% to £28.05. For a full market report, see: London market close

The markets also made gains in continental Europe, with the Paris Cac-40 up 112 points to close at 4,846. The German Dax-30 rose 142 points to 5,539.

Across the Atlantic, US stocks jumped after Ben Bernanke 's comments on inflation were taken to be more soothing than markets had expected. The Dow Jones Industrial Average soared 212 points to close at 11,011, while the S&P 500 rose 22 points to 1,259. The tech-heavy Nasdaq was up 37 to 2,080.

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The euphoria on Wall Street carried on in Asia, with Japanese stocks making strong gains. The Nikkei 225 jumped 446 points to 14,946. Exporters led the gains on hopes that a US slowdown may be avoided if US interest rates are kept at or near current levels.

Oil prices rose in New York this morning, with crude trading at around $73 a barrel. Brent crude was up too, at around $73.95.

Meanwhile, spot gold rose as high as $644.75 an ounce before easing to trade at around $639 as the dollar weakened. Silver was lower, trading at around $11 an ounce.

And in the UK this morning, owner of electrical retailer Comet, Kesa Electricals, saw first-half sales rise 11.3%, helped by sales of flat-screen TVs. But the group warned that 'the World Cup effect' had brought forward TV sales, and it remains 'cautious about the outlook for the second half.'

And our two recommended articles for today...

What the rising cost of the carry trade means for your investments- As central banks in Europe and Japan raise interest rates, the carry trade is becoming increasingly risky, says Richard Benson of Specialty Finance Group. The rising cost of carry is giving speculators plenty to worry about and investor behaviour has started to change as a result. To find out what this will mean for asset prices and, more importantly, your own investment strategy see: What the rising cost of the carry trade means for your investments

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Have US company profits peaked? - At 133%, US corporate profit margins are currently at their highest in fifty years, says Jeremy Batstone of Charles Stanley - and that's usually a sure sign that they've hit a peak. A note from the Federal Reserve confirms this, suggesting that growth could be on the wane, and with it corporate earnings. To find out why US equities are looking far less cheap than they once did, read: Have US company profits peaked?

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