House prices fell 0.6% in March according to the Nationwide Building Society. This leaves the year-on-year rate of increase at just 7.9%, its lowest level since June 2001. The drop in prices over the past month needs to be kept in some context. On this particular survey, prices have now fallen in two of the last four months but they are still higher than they were back in November.
Interestingly, the seasonally unadjusted house price actually rose between February and March and stands within a whisker of the all-time high touched last July. Moreover, it is conceivable that the poor March weather may have discouraged potential homebuyers.
Meanwhile, mortgage approvals edged up in February and there was also a positive revision to the January number. Historically, this has been a good lead indicator of house price inflation. Significantly, loans approved on property are still more than 30% lower in volume terms than they were a year ago.
Consumer credit fell back to £1.7bn from the near record January figure. Partly reflecting revisions going back to 2003, this number is consistent with a slight moderation in the underlying pace of unsecured borrowing. Even so, the three month annualised growth rate is still a healthy 13.5%.
Finally there was a sharp drop in mortgage equity withdrawal (MEW) in the final three months of last year. The amount of capital extracted during this period amounted to £6.9bn, the lowest level since the third quarter 0f 2001. A key reason for this decline is the drop in turnover in the housing market that took place at the end of 2004. The continued subdued trend in property transactions suggests that equity withdrawal is likely to weaken further this year.
For the whole of 2004, MEW amounted to £47.4bn. This compares with more than £55bn in 2003. Our best guess for 2005 is £35bn.
The combination of yesterday’s disappointing CBI survey of high street activity allied to today’s Nationwide report has diminished the prospect of a May base rate hike. That said, the arguments put forward by Paul Tucker at recent MPC meetings, particularly his concerns about the lack of spare capacity, are still relevant. Until there is clear evidence of a meaningful slowdown in the wider economy, it will be premature to conclude that the interest rate cycle has peaked.
