House prices experienced another gain in September, however the trend growth of house prices is now the lowest since July 2006, with credit conditions now clearly tightening for leveraged borrowers.
Fionnuala Earley, Nationwide's chief economist, said: "House prices recorded a reasonably strong gain of 0.7 per cent between August and September. Despite this increase, the 12-month rate of house price inflation came down to 9.0 per cent, as we are now entering a period during which house prices gains were particularly strong in 2006.
“This brought the average price of a typical UK property to £184,723. The 3-month on 3-month rate of price growth - often the smoothest indicator of underlying momentum - slowed from 2.0 per cent to 1.6 per cent, the lowest level since July 2006.
“Overall, house prices defied the gloomy predictions of some recent headlines, but their underlying growth is still on a decelerating trend.”
She said the financial turmoil has dampened hopes that the crisis will blow over quickly, with higher wholesale funding costs leading to a credit price reassessment in the mortgage market.
Earley continued: “As expected, this has not had an immediate impact on house prices, but the longer-term effect will undoubtedly be to take some of the froth out of the market.
“Over the last year, borrowers who have wished to extend themselves to the limit have been able to do so relatively cheaply in comparison to more restrained borrowers. While some lenders are still willing to extend loans with little or no deposit, such products are now more expensive, reflecting the extra risk involved.
“The difference in rates available on 95 per cent loan-to-value ratio (LTV) fixed rate mortgages and their 75 per cent LTV equivalent soared in August. The average market rate for a 95 per cent LTV 2-year fixed rate mortgage was 0.45 percentage points higher than the rate on a 75 per cent LTV equivalent in August, compared with only 0.29 percentage points in July and a low of 0.23 points in April.
She urged intermediaries and borrowers alike to heed the warning that risk must always have its price. Earley also predicted that highly leveraged borrowing will remain less attractive and lending volumes in this segment may decline.
Looking to the future, specifically the fallout this will have on interest rates, she advised: “The re-pricing of credit risk and the tightening of lending criteria is only one side of the credit crunch story. Events of the past two months now appear to mark a clear turning point in the interest rate outlook.
“Sentiment has changed significantly as the potential adverse economic impact of the credit crunch has been acknowledged by the MPC. The likelihood is now that we will see a cut in base rates early in 2008, which is good news for mainstream borrowers and those coming off fixed rate deals.
“The more dovish outlook for base rates is beginning to be reflected in swap rates – falling swap rates are an indication that upward pressure on mortgage pricing from the base rate environment is receding, at least in the short term.
“This implies that for mainstream borrowers with good credit quality and lower LTVs, credit conditions have not deteriorated as much as the headlines may suggest. It also suggests that payment shock for borrowers who need to re-mortgage in 2008 may not be quite as large as previously anticipated.”
