* House prices rose by just 0.7 per cent in January according to the Nationwide Building Society. This is the lowest monthly gain since March of last year. Meanwhile, the annual rate of increase slipped to 14.3 per cent. The last time the year-on-year rate of growth was below this level was in March 2002.
* Despite this, the press release from the Nationwide makes clear that ‘is is too early to call with any certainty whether the housing market has yet moved into a phase of lower price inflation’. Crucially, the key drivers of property prices remain reasonably supportive. Our model highlights the importance of employment in underpinning the market. If recent survey material (PMI’s and the CBI) is anything to go by, this factor is likely to become increasingly positive over the balance of the year.
* We estimate that across the whole country, the house price to earnings ratio currently stands at around 5.4 times. This is above the peaks seen in the property booms of the early 1970’s and the late 1980’s. On both those occasions, the ratio fell just short of five times at its high. However as the chart below demonstrates, housing actually still remains reasonably affordable from a historic perspective. Our analysis suggests that, on average, the initial mortgage payments of homeowners currently amount to less than nineteen per cent of their earnings. This compares with a thirty-year norm of twenty two per cent.
* This does not necessarily mean that the current rate of house price inflation is sustainable if base rates do creep upwards over the course of the year. First time buyers, in particular, face difficulties. However, with more jobs being created any moderation in the trend is likely to be limited. We see little justification at this point in time for fears that there will be outright price falls later in 2004.
* Meanwhile, the GfK consumer confidence index rebounded smartly climbing to its best level since November 2002. The key reasons for this improvement were greater confidence about the economic outlook and a perception that this is a good time to make major purchases.
* Although the prospect of higher base rates could have been expected to have an adverse impact on this index, our research show that the full effect on sentiment of this variable tends to be lagged by something in excess of four quarters. Moreover, as discussed above, the fact that interest rates still remain low by comparison with the recent past is likely to have a greater influence on household behaviour.
* Today’s surveys will provide further support for those members of the MPC advocating an increase in base rates next week. It now seems improbable that the opportunity to tighten policy in a modest way will be eschewed.
