House prices rise just 0.1% during August as annual increase eases to 18.9%.
Interest rate cycle could be close to peak, but energy price rises could equate to further 1/4 percentage point on mortgage rates for households with £100,000 mortgage.
Forecast for house price inflation in year to December 2004 remains at 15%.
Commenting on the figures Alex Bannister, Nationwide's Group Economist, said: "Price growth declined sharply in August with the price of the average house rising just 0.1% (seasonally adjusted) during the month. Consequently, the annual rate of house price inflation eased to 18.9% in August, from 20.3% in July. The price of the average house now stands at £153,743. Although August’s price rise was the lowest monthly increase for almost three years, a better indication of the underlying trend is the average rate of price growth over the last 3 months. On this measure, price growth has moderated rather than slumped, with prices rising by an average of 1% per month compared with an average of 1.7% per month over the previous three months.
"The weight of evidence suggests that housing market activity has slowed more markedly than price growth. Bank of England data shows that the number of house purchase mortgage approvals in July fell to the lowest level since the end of the Iraq conflict. We expect data for August to show a similar picture. Survey evidence has also been weaker over recent weeks. Whilst this will to some extent reflect the usual summer lull, underlying activity levels have slowed. In addition, asking prices appear to have fallen sharply over recent weeks. The downward adjustment relative to agreed house prices is likely to have been in part a reaction to the strong spring and early summer periods when asking prices rose more quickly than agreed house prices. While we don’t expect agreed prices to decline, the trend in price growth is expected to remain on a weaker path for the rest of the year.
Interest rates near their peak…
"High levels of housing market activity and price growth over the last year or so have been underpinned by the strong jobs market, low interest rates and homebuyers’ expectations that house prices will continue to rise strongly in the future. Whilst interest rates remain at historically low levels, the Monetary Policy Committee (MPC) has now raised interest rates five times since November last year. This rate movement has removed some of the stimulus to the market. For someone with a £100,000 mortgage, the base rate increases will have added just under £70 to their monthly payment. Around 3 million households are on fixed rate deals and will not have seen their payments rise in response to the increases in the base rate. Many are on two year deals and those now coming to the end of the deal period will find that fixed rates have jumped to around 5.2% compared with 4.4% two years ago. ‘Payment shock’ will rise over the coming year; we expect that those who took a fixed rate deal in early summer 2003 (at around 3.75%) will find their rate jump to around 5% in summer 2005.
"In addition to the direct monetary impact of higher mortgage rates, the base rate increases will have created some uncertainty about the prospective peak in rates. The sequence of rate hikes will have had an important impact on buyer sentiment and people’s willingness to stretch themselves. However, the tone of comment coming from the MPC has become increasingly ‘dovish’ over recent months. This has led the financial market to downgrade their expectation of future interest rate increases. Back in June, the market was pricing in short interest rates of around 5.75% by September 2005. The market now thinks that the base rate will only need to rise to around 5.25%. Our own expectation is that rates will increase once more in the current cycle , meaning that rates peak at 5% by year-end. Either way the consensus now seems to be that rates are nearing their peak.
"There have been seven interest rate cycles over the last 25 years with the majority lasting for between 3 and 5 years. The current cycle doesn’t look too different in length — although the likelihood is that rates will peak significantly below the level seen previously. If rates do peak at 5% by year-end, initial mortgage payments will rise to 30% of take home pay. Last November before rates started rising initial mortgage payments stood at 25% of take home pay and back in the early 1990s they were at 39% of take home pay.
…as oil prices rise
"Rising global activity and concerns over supply drove the price of oil to record highs in recent weeks. At the same time other energy prices have also been rising. Some commentators have stated that these increases are likely to be inflationary and could result in higher interest rates. Our view is that they are more likely to dampen consumer demand and could act as a further drag on the housing market. If expenditure on energy rose by around 10% by the end of the year as gas, electricity and petrol price increases filter through to the consumer, the average household will spend an extra £17 per month on energy. Based on the typical mortgage this is equivalent to an increase of around 0.25 percentage points on mortgage interest rates. The MPC may offset rising energy prices by not increasing the base rate by quite as much as otherwise would have been the case, but if this doesn’t happen rising energy prices may act as a further drag on the consumer.
Forecast remains at 15%
"Our expectation at the start of 2004 was that price growth would ease during the second half of the year with much of the slowdown arising in the areas that had seen prices rising fastest during 2003. Price growth has moderated in all regions over the last couple of months. Despite price growth slowing more markedly in the less expensive regions such as Wales, the North and Scotland, house price inflation remains higher in the North and West than it is in London and the South East. House prices have risen 11.7% since the start of the year. Our forecast for annual house price inflation in December 2004 remains at 15%, implying an average increase of 0.6% (seasonally adjusted) per month over the remainder of the year. We expect a slowdown over the last part of the year partly as a result of the five rate rises that have occurred since last November. However, it is not interest rates alone acting as a drag on the market. Take home pay (after allowing for inflation) which has risen by an average of 2.1% per year since the late eighties has been rising at an average of just 0.4% per annum since the start of 2003. A downgrading of buyers’ expectations of future price rises and weaker demand for buy-to-let property, given low rental yields, are also likely to play a role.
More affected by inheritance tax and stamp duty as prices rise further
"Since April 2000, house prices have risen by 90% and are expected to rise a further c.3% during the rest of this year. In contrast over the same period the inheritance tax threshold has risen 12% from £234,000 to £263,000 and stamp duty thresholds have remained unchanged. As a result, the number of people affected by these taxes has risen sharply. As an indication, back in 2000 1 in 15 properties traded were above the inheritance tax threshold. The proportion has now risen to around 1 in 7 and is expected to rise further in coming years. Similarly, 10 years ago only 1 in 5 first-time buyers paid stamp duty. Today 3 in 4 pay the tax."
