- House prices fell 0.2% in December
- Annual house price inflation, at 12.7%, eases to lowest level for almost three years
- London house prices rose by just 1% over the second half of 2004
- Trebling in house prices since 1995 forces buyers further down the housing ladder
Commenting on the figures Alex Bannister, Nationwide's Group Economist said: "The price of the average house fell 0.2% (seasonally adjusted) in December. December’s fall in prices took the rate of annual house price inflation to 12.7%, down from 15.0% in November. This is slightly below our 15% forecast for house price inflation during 2004 made back in March but above the 9% forecast published in December 2003. During 2004, the price of the average house rose by just over £17,000, equivalent to £47 per day.
"2004 was the fourth consecutive year of double digit house price inflation; following increases of 14%, 25% and 16% in 2001, 2002 and 2003 respectively. However, the high rate of annual house price inflation masks a year of two very distinct parts. Over the first seven months of the year prices rose 11.4% but since July prices have increased by only 1.2%. December’s fall in the price of the average house was the second monthly fall in the last three months. Despite this, house prices are up 0.7% (2.8% on an annualised basis), compared to three months ago.
"Developments over the course of 2004 were much as we had been expecting with some regions, including the North and Wales, experiencing a rapid deceleration in price growth over the latter part of the year. Although monthly house price inflation is now much weaker than earlier in the year, the trend in prices remains moderately upwards. In contrast, survey evidence appears to paint a somewhat weaker picture, suggesting prices are falling at their steepest pace since December 1992. However, whilst survey data has tended to move in broadly the same direction as the hard price data , the correlation between the two is far from perfect. Our view is that the survey evidence says more about the breadth, in terms of the regional spread, of price movements as opposed to the depth of price movements. As such, the evidence is consistent with house prices ‘treading water’ in most regions. A sharp downturn in prices cannot be completely ruled out, but whilst the economic outlook remains positive it looks unlikely. Importantly, we do not foresee a recurrence of the sharp increases in interest rates and large-scale joblessness that resulted in house price falls in the early nineties.
"At the regional level, the North-South divide in annual house price increases which became evident in 2003 persisted into 2004. Prices rose fastest in the North West (up 24.6%) and Wales (up 24.4%). Price growth was slowest in London (up 7.6%), followed by the Outer Metropolitan region (up 8.0%) and the Outer South East (up 10.5%). In pound note terms, the biggest increases were in the North West (up nearly £28,000) and Wales (up nearly £27,000). In contrast, the average price in London rose by just over £16,500. The smallest increase came in Northern Ireland, where although prices were up just over 16%, this equated to a £15,000 increase in price.
"Since 1995 house prices have trebled but average incomes have risen by just 50%. This has made it increasingly hard for would-be first-time buyers to enter the housing market. We expect just 349,000 properties will have been bought by first-time buyers in 2004. This would represent the third consecutive year of falling first-time buyer numbers and the lowest figure since the mortgage market was deregulated in the mid-eighties. Those that have managed to enter the market, in addition to many existing homeowners trading up, have been forced to purchase further down the housing ladder than was the case in 1995. Our analysis (see page 5) shows that someone on average earnings in 1995 could afford a semi-detached property and, in some regions, detached properties. The properties that someone on average earnings can now afford tend to be lower down the housing ladder, are smaller and are probably in less desirable locations.
"The recent slowdown in monthly house price growth and the falls in housing market activity, in part, reflect the changing economic backdrop to the housing market over the last year or so. Economic conditions are not unfavourable (employment at 28.4m is at record levels and the base rate, at 4.75%, remains relatively low by historical standards). However, five interest rate increases since November 2003, relatively subdued take-home-pay growth and stretched affordability have acted as a brake on the housing market. In addition, a downgrading of homebuyer’s expectations of future house price growth is also likely to be having an impact on price growth.
"It is our view that the economic climate and housing market conditions over the last few months will be a reasonably good guide to conditions in 2005. We expect house prices to end 2005 up between 0 and 5%. However, the likelihood is that price growth will be towards the bottom end of this range, probably at 2%. Broadly favourable economic conditions combined with the ongoing imbalance between the demand for housing and the rate of new build mean that a significant decline in prices will be avoided. Whilst this cannot be guaranteed with certainty, indications are that following the downward shift in activity and price growth during late 2004, the housing market may be beginning to stabilise."
