Alex Bannister, group economist for finance and planning at Nationwide, said: "Although we expect some increase in base rates and unemployment this year, the economic backdrop remains favourable for the housing market. Unemployment is currently at a 35 year low, interest rates are at a 40 year low and consumer confidence remains high. In addition, although average earnings growth is falling, real take home pay is still rising at historically high levels. Given this backdrop, the strong start to the year and the strength of confidence in the market we have revised our forecast up to 10 per cent from 6 per cent.
"Although higher base rates and unemployment will dampen market conditions later in the year, we now believe that there is enough momentum for prices to increase by 10 per cent during 2002. However, double digit price growth is ultimately unsustainable and we therefore expect the fundamental constraint of affordability to slow the market. Nonetheless, January saw an annual increase of 50 per cent in the number of first time buyers so it could be some time before affordability exerts enough downward influence to slow price growth in a more significant way.
"Some commentators have suggested that the current record level of debt will eventually weigh on homeowners particularly if base rates begin to rise. However, rates would need to increase by 4 per cent (a doubling of current rates) to push mortgage payments back to late eighties levels. While we do expect base rates to rise above 4.5 per cent this year, this will not be enough to slow the market more significantly than assumed in our 10 per cent forecast. Hence our view that it will be affordability which, over the next few years, will dampen the market naturally. It will do so by pricing first time buyers and key workers out of the market in certain areas. This is a slow process and we do not envisage a return to the sudden bust scenario seen in the early nineties. Unemployment is set to remain relatively low and deposit levels required by lenders and desired by borrowers are generally above 5 per cent. We therefore anticipate little forced selling and homeowner reluctance to accept price declines. Responsible lenders must allow affordability constraints to begin to limit price growth rather than stoke the market by lending ever increasing amounts.
Other findings in the lender’s monthly survey included a report that said UK house prices rose by 0.9 per cent in March, taking first quarter growth to 3 per cent.
Bannister said: "The housing market continues to show strong price increases, with the price of an average UK property up 0.9 per cent during March following a 1.6 per cent increase a month ago. Buyers have become used to double digit house price growth and this is underpinning demand for property.
Across the regions East Anglia showed the strongest increase in prices, at 18 per cent, for the third successive quarter.
