* Residential property prices rise 3.1% in February
* Property sales picking up, but turnover remains historically low
Headlines February 2004
February January
Monthly Index (seasonally adjusted) Q1 1993=100 280.9 272.4
Monthly change (seasonally adjusted) 3.1% 0.7%
Annual change 17.1% 14.3%
Average price £138,730 £134,806
Commenting on the figures Alex Bannister, Nationwide's Group Economist said:
"There was no respite for first-time buyers in the last month as property prices surged higher in February. The price of the average property rose 3.1% (strongest monthly increase since April 2002) following a 0.7% increase in January. The rise took the annual house price inflation up to 17.1%, from 14.3% last month, and the price of the typical property up to £138,730 - a rise of more than £20,000 over the last 12 months. This time a year ago annual house price inflation was running at 25%, but fears over global economic stability at the time of the Iraq conflict knocked confidence and pushed the annual change down to 16% by end of the year. Despite two interest rate rises in the last four months, confidence in the outlook for housing is once again improving. Taking the last three months together, prices have risen by an average of 1.8% per month, compared with an average pace of monthly growth of around 1% during 2003. This acceleration is a little surprising, given affordability concerns, but probably reflects buoyant employment and a continued lack of property supply. Although the market is set to remain strong in the near term, by the end of 2004 we expect a deceleration in property price growth caused by lower income growth and higher interest rates.
"Although economic conditions look unlikely to produce a more significant slowdown, additional housing taxes or hikes in existing housing taxes could knock confidence. We welcome the Barker Review and agree with the interim findings suggesting that the rate of new build has not responded to the sharp rise in house prices over recent years. Our preference would be to encourage further supply rather than to increase taxes. In fact, given that the level of first-time buyers is now at its lowest level for at least 20 years Nationwide has called on the Government to abolish stamp duty for houses below £150,000. In addition, we continue to call for caution on the part of lenders and buyers - they should not to be encouraged by current unsustainable property price growth to overstretch themselves."
Signs of a strengthening Southern market, but North still leads the way
The North-South divide in house price growth remains; with more affordable areas such as the North carrying over momentum from late 2003 into early 2004. Price growth in London and the South East remains more muted. However, the recovery in the corporate sector and increased merger and acquisition activity means that, in contrast to early last year, the labour market and annual bonus outlook is now strongly positive for the housing market in London and the Home Counties. As a result, there are now signs of renewed interest in housing in these regions which may well feed through to higher purchase prices over the coming months.
Rates to rise, but Monetary Policy Committee to remain cautious
Following November's interest rate increase the Monetary Policy Committee hinted that base rates may rise less quickly and possibly peak lower than many had expected. They had concerns over how highly-indebted consumers might react to rising interest rates following nearly three years of falling or static rates. However, the continued strength in the housing market in conjunction with other consumer sector data, such as recent retail sales data showing volumes up 7% (annualised) over the three month Christmas period, suggest that the consumer has not yet finished spending. The lags between interest rate changes and consumer activity can be quite long and the effect of February's rate rise is still to be felt. However, it should be remembered that even after February's rise rates are still at a 40-year low (excluding 2002) and initial mortgage payments for a typical mortgage will have only risen to 29% of take-home pay.
A justification for raising rates to slow the housing market might be that the current pace of debt growth and house price inflation risks a collapse in consumer confidence at some point in the future; which could lead to an undershoot of the inflation target. However, the MPC's most recent two-year ahead forecast suggests inflation broadly in line with target (2%). This is the dilemma facing the MPC: should they risk under-shooting their inflation target, and possibly causing deflation, in order to produce a sustainable rate of house price inflation. Our view is that they are likely to raise rates gradually over the next year.
Low turnover suggests slowdown, not slump
In contrast to much of last year, strong price growth is now arising in conjunction with higher levels of activity. There have been 370,000 approvals for house purchase over the last three months - the highest number for more than 10 years. While this may reflect some release of pent up demand from first-time buyers following last year's uncertain outlook, their numbers will remain low over the course of this year - we expect just 342,000. This is the lowest number for at least 20 years and means there are far fewer 'vulnerable' buyers than in the past. Overall we expect house sales of 1.4m during 2004 - representing turnover of just 7.7% of the owner-occupied housing stock (compared with an average 13% during the eighties). So despite the recent pick up in sales, the market will remain relatively 'thin' and less vulnerable, than in the past, to changing economic conditions such as higher unemployment or interest rates.
In addition, although the market is highly valued, we do not believe that property prices are extremely overvalued. Mortgage payments will rise to 31% of income if base rates move to 4.75% as we expect during 2004. However, this is still considerably below their average at the peak of the eighties boom period (38%). In addition, the ratio of property prices to rents remains 11% below the level seen over the mid to late eighties and this provides a level of comfort that house prices are not extremely overvalued. On balance, higher rates and a weaker labour market are still expected to produce weaker price growth in the second half of 2004, but a significant correction to the market remains a remote prospect.
