This is lowest since Q2 1996 and down from 14.3 per cent this time last year. Britain’s housing market has been slowing for almost a year and it not the only market that has changed markedly in the past year.
The housing markets in Australia and the UK continue to slow in 2005, having both witnessed substantial house price booms over the past decade. House prices have risen 122% in Australia and 170% in the UK since 1996 Q2.
In the second quarter, house price inflation in Australia went negative for the first time since the first quarter of 1996. The slow down has been abrupt as it was only 18 months ago that prices were rising at annual rate of 19%. The situation in the UK is similar, with prices rising at annual rate of 25% at the end of 2002.
Now though, the annual rate of increase has fallen to 4% in the UK according to ODPM statistics for July as prices have stagnated in the last three quarters. However, the experience of Australia suggests that the UK does not face a substantial drop in prices.
Meanwhile, the upswing in US house prices continues to gather pace with prices nationwide 13.4% higher in Q2 than they were this time last year, the fastest increase ever recorded. There are now 25 US states in which prices are rising above 10% per annum, 8 of which are recording rises of above 20%.
Speculation has increased in recent years that house prices in the UK and Australia might fall after many years of rapid growth. In the UK this cooling was precipitated by a tightening in monetary policy. Between November 2003 and August 2004 the Bank of England raised interest rates by 1.25%. Due to the structure of the UK mortgage market, this tightening had a direct and almost immediate impact upon mortgage interest rates that have now risen for five consecutive quarters.
This in turn has led to virtually flat real house prices since the third quarter of last year. Sustained rises in employment levels have been supporting the market, and as along as the fundamentals stay strong then it is hard to see any severe correction in prices occurring.
In Australia the slow down in house price inflation is also in part due to changes in monetary policy. The Reserve Bank of Australia has raised interest rates by 1.25% since 2002, and mortgage interest rates have matched this increase. Australian housing market slowdown has been more abrupt than in the UK, as prices have been more stretched in relation to earnings compared with the UK through much of the upward price cycle. Also, a larger slice of demand has been driven by investors. However, investors in Australia have responded to the increase in interest rates by sharply curtailing activity in 2004.
The price declines in Australia have so far been modest and have been concentrated in Sydney, where affordability ratios had moved furthest away from historical norms. Severe price declines are unlikely as owner occupier demand has not been significantly hurt by rising interest rates (loans to occupiers in July were 37,400, close to their long-term average), as demand has been supported by strong macroeconomic fundamentals.
Employment is high and rising fast, supporting robust growth in domestic demand. The experience of Australia in the past year suggests that the UK market will at worst stabilise if economic conditions hold-up.
The US housing market seems to be several steps behind the UK and US. The housing boom continues to gather steam with real house prices nationwide now more than 10% higher 2005 Q2 than a year ago, the strongest increase on record. The boom is been extended and strengthened by the peculiar behaviour of long term interest rates. While the Federal reserve has raised interest rates around 3% since early 2004, long term interest rates have actually fallen in that time.
This has supported the housing market as most US mortgages are fixed long-term. Cheap financing plus improving fundamentals of growth and rising employment levels have boosted the demand for housing. While house price rises the current magnitude cannot continue indefinitely, it seems likely that the bull run has a while to go yet because interest rates remain low. However, if for any reason the US experiences a major upward correction in long term interest rates, this would certainly dampen the market as well as cooling the economy as a whole.
