THE average price of local market properties has been rising steeply since 1996. In the first quarter of that year they were selling for just over £100,000.

In the same quarter of 2006, their average selling price was nearly £320,000, more than treble and itself 11% higher than the equivalent period in 2005.

The quarterly figures can be volatile, but they do reflect a real long-term upward trend in local market prices.

But what is the current state of the housing market and what might the future hold?

Prices are clearly a function of supply and demand.

Although the supply has risen in the island, particularly the number of apartments, limited land and planning restrictions have ensured that supply is relatively fixed and prevented it from keeping pace with demand.

If demand outstrips supply, house prices will rise and it is demand that has been driving the local housing market.

The main determinants of the demand include people’s level of income, speculation, demography and the price and availability of mortgages.

Local estate agents report that the market is currently very robust. Prices are rising because there is a shortage of houses – notably in the middle bracket – and strong demand.

One agent has even been reported as urging purchasers to buy now before prices rise even further, which can only promote speculation and further price increases.

Of course, estate agents have a vested interest in encouraging people to move home because it is this activity that earns them their living and this may be why they are saying that house prices are rising.

Seasonality may also be a temporary reason for the current vibrancy of the local market because people are focusing on their holidays instead of selling their homes, so buyers have less choice.

Estate agents may be genuinely right, however, in claiming that Guernsey house prices are still increasing for long-term, structural reasons.

Demand is strong at the moment for the very same reasons that house prices have trebled over the past decade.

The economy is relatively healthy and personal incomes are high because unemployment remains low and earnings are strong.

Interest rates continue to be low and the banks still have the confidence and liquidity to offer mortgages based on high earnings multiples.

There is a limited supply of quality housing.

A growing population and the fragmentation of the family mean that there are more buyers.

Speculation that house prices will continue to rise encourages people to buy now because they fear even higher prices and the increase becomes self-fulfilling.

Structural changes in the island also suggest that on balance house prices will continue to increase.

The supply of housing will continue to be relatively fixed unless the States performs a volte-face and permits the development of the rural area.

The pursuit of economic growth to close the fiscal deficit will require an increase in the population and the arrival of many highly-skilled immigrants who will command high salaries, as well as higher earnings among the indigenous population.

This will ensure that there are more wealthy buyers chasing a static number of properties, which will result in higher demand and therefore higher house prices. Property speculation over the next couple of years might also intensify.

It is improbable that increases in tax on rateable value or the capping of interest relief on mortgages at £400,000 will be significant enough to dampen the market.

Moreover, if UK and global inflation continues to rise and central banks raise interest rates, this withdrawal of liquidity and higher borrowing costs may subdue the housing market, but it will only endanger the economic growth that the island is relying on to replenish the public finances.

The island’s pursuit of economic growth might fill the black hole, but it is likely that house-price inflation will be one of the consequences. The States must therefore be ready for potential social tension among poorer locals and first-time buyers – and a growing exodus of locals – as well as the risks of an asset-price bubble and excessive debt levels that are vulnerable to the economic cycle.

* Comments to rich@hemans. net. Richard Hemans is a chartered accountant who works on a freelance basis.