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Where are UK property prices heading following the Credit Crunch? Few, if any, honest souls can claim to have predicted the meltdown that followed the revelations of those inventive bankers who devised countless fiendishly clever methods of packaging and re-packaging their worthless paper and selling it on at a thumping profit. This highest of high stakes game of Pass the Parcel had to end some time. And when the music inevitably stopped this side of the Atlantic and the banks put the shutters up, among the earliest casualties was the UK property market.

The first outward sign that something was amiss here was when the queues started forming outside the Northern Rock branches in September 2007. But, although it wasn’t widely reported, the UK Property Market was already showing signs of faltering. Data from the Emerge Group (visitor and reservation numbers from around 670 new homes developments across the country) were reflecting a levelling off in key indicators. While prices were still rising at the beginning of the year, the rate of increase was beginning to tumble as early as June. The bubble was already starting to look decidedly thin in places – ask any developer trying so sell city centre apartments! I am convinced we would have been in for a difficult market regardless of the extraordinary background economic conditions that were about to unfold. But when Bear Stearns finally gave up the ghost and the world financial markets imploded in spring 2008, it gave the market a huge shove on its journey downhill and the resulting meltdown was simply breathtaking to behold. The speed of the deterioration across all measures was beyond my thirty years property market experience. The charts I use at presentations still stretch back to January 2008 so the audience can appreciate the severity of the fall in confidence, visitor numbers, buyers, prices, well … everything really.

But – and it’s a big but – although the market was dire and it became difficult to see where the next sale was coming from on occasions, the one thing that got a whole lot easier was predicting how the market was moving. In May last year I Tweeted that we would eventually look back and consider November 2008 as the lowest point in the housing market. Maybe I was a month or two early in that prediction – but no more than that. The fact of the matter is, despite the dislocation in the financial markets, the budget deficit, the general election and everything else, the demographic conditions which drive the UK market have not changed. There is still more demand than supply – in fact, given that new housing starts are currently about half of their normal average and the number of second hand properties coming onto the market is at an historical low, the position is even more conducive to over-heating than usual. And, as the new homes industry tries to rebuild the volumes it needs to sustain it and satisfy the demands of the City, the land market is already starting to heat up. Forget the non-committal bland forecasts of the Usual Suspects as they avoid the risk of making themselves look foolish; bidding for the prime residential development sites is fiercely competitive at the moment. Every developer is looking for the same type of thing (no-one wants to build apartments any more!) and inflation is already well into double figures for these prime sites over the last 12 months – and will continue to climb through 2010. No question.

So, what of the residential property market for 2010?

I love reading the pages of the national press as they do their best to interpret the conflicting messages coming from the established sources of market intelligence. The Guardian even featured in the pages of Private Eye recently for running headlines just three days apart predicting bull and bear markets with equal certainty. They’re not on their own. Most of the dailies are running around like headless chickens with tales of doom or delight depending on which day you happen to read them. A startlingly naïve year-end article in The Times recently claimed the 2009 property market took everyone by surprise – where have they been?! The journalist had clearly forgotten the Halifax index was in positive territory as early as January last year. The problem is the property market doesn’t perform in the way that most other markets do. For all the calculations of the economists, the caution of The RICS, the reluctance of the banks and optimism of the politicians – this market is dominated by sentiment. The low volume – high value nature of the business makes it highly volatile and incredibly susceptible to shifts in consumer confidence. These shifts are caused by a combination of factors; including – but to a lesser extent in recent times - the emotive stories the newspapers relentlessly propagate. But, the real influencing factors, the twin pillars that underpin consumer confidence, are interest rates and unemployment or, to be more accurate the trend in these measures.

One of the most accurate predictors of the UK market is the EC survey on consumer confidence, both in their own household finances and those of UK plc - plus where they believe UK unemployment is headed. These indexes remain surprisingly positive, despite all of the financial news and profits of doom and they have been that way for many months. This offers an explanation for the firm start to the year and I believe we will see a steady increase in activity as we move into the spring.

One of the big problems with forecasting prices is which measure to use; Halifax, Nationwide or CLG? And now we also have the big property portals to refer to, Rightmove, Hometrack and the like. None of them is perfect, but at least they are consistently inconsistent. On the basis we are able to track the Halifax index all the way back to 1983, it is my preferred measure, even though it is flawed on a number of counts. Not least of which is the concept of averages when we are considering a market of infinite variety.

It is impossible to predict some of the situations and events that will feed into the mix throughout the next 12 months – not least of which is a general election. Like many others, I believe a hung parliament would be the worst possible result. Just think about how that might affect confidence in the UK economy and that all important sentiment I referred to earlier.

Nevertheless, I predict a small increase averaged across the market in Q1, in the region of 2 to 2.5% and then double that in Q2, around 5%. If, at that point, the election has resulted in a new Conservative government – or even a new Labour government – then I am confident the increases will be sustained, albeit at a slower rate. Hung parliament aside, I predict further growth of around 1.5% in Q3. I reserve the right to revise my forecast before we reach Q4 2010. An awful lot may have happened in the interim! However, barring any extraordinary event, I am confident the annual increase will be between of 10% and 12% across all regions and types and some regions in the UK will see inflation close to double that.

So there you have it. One more prediction to line up alongside those of the banks and the rest. One thing’s for certain, if the fickle UK homebuyers suddenly decide that things are looking black, it’ll change fast. The feedback I get from sales negotiators around the country is my early warning system – keep your eyes on Twitter!

Matt Fleming

Matt Fleming is founder and Chairman of Aylesworth Fleming Limited and a director of Emerge Limited the UK’s leading property specialist marketing group. Over the past 25 years he has advised many of the UK’s leading developers and estate agents and has earned a reputation as a leading industry strategist. Follow his insightful updates at twitter.com/matthewhenry