The most likely outcome from the 2010 election appears to be a hung parliament, which presents significant new risks, as well as some opportunities, for the housing market, argues Liam Bailey, head of residential research for Knight Frank.

"The housing market saw a marked slowdown in activity in the run up to the election, mortgage approvals fell 30,000 between January and March compared to the previous three months, and sales volumes across the UK have declined.

"Knight Frank's research in London confirms that buyers and prospective vendors have been increasingly likely to sit and wait for some post-election clarity. Unfortunately the morning after the election we still do not have that clarity.

"Irrespective of the composition of the next Government, the future outlook for the UK's housing market will be determined by a single policy issue - the approach taken to tackling public sector debt.

Scenario 1 A stable Conservative led Government

"It seems possible that if Gordon Brown, who as the incumbent prime minister has the first chance to form a coalition government, fails to gain a sufficiently strong mandate the Conservatives will try to govern alongside Northern Ireland's Unionist parties.

"If David Cameron is able to create a sustainable coalition, he is likely to be much more radical in his attempt to cut the deficit than he alluded to during the campaign. The Conservatives are likely to try to reduce the deficit to below 4% of GDP within five years, and potentially even below 3%.

"Spending cuts will be favoured over tax rises, and these cuts will need to be large. The result will be that the pound will rise in the short term, and bond yields will fall as investors become more confident in the UK's wiliness to address the fiscal crisis.

"Rising unemployment from lost public sector jobs, and lower wages from pay freezes and even cuts will put some downward pressure on the housing market. So too will negative impact of the wave of strikes which will undoubtedly accompany this process.

"These negative trends will, however, be offset by lower interest rates and mortgage rates which are likely to follow declining bond yields. Increased investment interest in property, and other assets, will follow the lower cost of financing.

"These trends will mean that while we still expect house prices in the UK to end the year down slightly, these falls ought to be modest. The trends also point to slow growth in sales volumes over the year, reversing the pre-election slowdown.

Scenario 2 - An unstable coalition

"It seems from the current results that a Labour/Lib-Dem coalition would still lack an overall majority, and there is still a real prospect of a messy and unpredictable coalition government, with a real question mark over its ability to push through tough legislation on government debt.

"The initial reaction from the financial markets over night gives some indication of the impact of this more uncertain outcome - with the pound falling back and gilt yields rising.

"If these trends continue there will be a growing risk of higher inflation, due to the weaker pound pushing up import prices, and rising interest rates on the back of higher gilt yields. Both trends would create pressure for higher interest and mortgage rates.

"Under this scenario the risk for the housing market would be a greater number of mortgage arrears and even defaults with higher mortgage costs, and also much slower return of growth to mortgage lending over time.

Confident predictions

"If the above comments are unavoidably hedged with uncertainty, we can at least say with more confidence that the current trend towards a two-tier market, split between an active mid and upper end and a more depressed lower end, will continue.

"Mortgage availability will remain tight over the next two years, especially as the banks begin to repay government loans extended through the Special Liquidity Scheme at the height of the credit crunch. The banks will also continue to ration mortgages using sharply differentiated lending rates depending on deposit levels.

"With the Lib-Dems unable to capitalise on their apparent surge in popularity during the election campaign, we can also be fairly confident that their proposed "Mansion Tax" and VAT on new-build housing will not see the light of day - much to the relief of estate agents and house-builders.

"It will not be at the top of the list of the next government, but the days of the Home Information Pack certainly seem numbered, to the benefit of the market.

"Despite all of the uncertainty we find ourselves with the days after the election, we stand by our current forecast that house prices in the UK will end the year 3% lower when compared with the start of the year, and that prices in the central London prime market will rise by 3%."

* Liam Bailey, head of residential research for Knight Frank

Article by: Liam Bailey - www.realestateweb.co.za