-Prices increase by more than £100 per day
-Debt to slow the market over the medium-term
Commenting on the figures Alex Bannister, Nationwide's Group Economist, said: “The price of the typical house rose 2.1% during April. The rise took the price of the average house to
£145,918, an increase of nearly £3,500 in the month or more than £100 per day. The 7% increase in prices since the start of the year means the price of the average house has risen 18.9% compared with a year ago - the highest annual inflation rate since June last year. Prices have risen by an average of 1•% per month this year so far. Our forecast of 15% implies average price rises of just under 1% per month for the remainder of the year – a clear reduction in the pace of price growth.
“Having peaked at 26.5% in early 2003, UK annual house price inflation slowed to 14.3% in January 2004 before pushing back up to 18.9% this month. Underlying the average price rise, the UK housing market remains regionally polarised with prices continuing to rise rapidly in the cheaper North (prices were up 33.3% in the year to Q1) and more slowly in the South East (prices in London were up 6.3% in the year to Q1, but growth is likely to have picked up since then).
“The Nationwide Headline UK All Properties Index, showing prices up 2.1% in April, reflects our best estimate of the price, and rate of change, of a typical property. Other indices, by giving more weight to more expensive properties and regions, put greater weight on the slower growing but more expensive London and South East. As a result, annual price inflation on, for example, the ODPM index stood at around 10% in Q4 – which is closer to our own detached property index (the index which monitors prices towards the upper sector of the market), which was up by 12.3%. Our headline UK index is not biased regionally or by sector and so in isolation cannot adequately describe the
diversity of price changes in each region and sector of the market. As a result, we publish an additional 153 other indices providing detailed price information by region and property type.
Price falls unlikely “The number of market house purchase approvals (seasonally adjusted) remained high at 117,000 in
February, suggesting activity in the housing market will remain strong over the summer. However, as was the case throughout 2003, when just 359,000 first time buyers managed to get on to the property ladder (down from 521,000 in 2002), the number of new entrants remains low.
Just 28,000 bought in February and we expect only 350,000 to enter the market in 2004 as a whole. Between 2002 and 2003
buy-to-let purchases increased by 58,000 (from 130,000 to 188,000), but this increase has clearly not been significant enough to offset the decline in first-time buyers.
“Instead it is existing homeowners, many with large amounts of equity as they purchased their property prior to the recent rapid rise in house prices, who continue to sustain the market by trading between themselves. Although this could go on for some time, price growth at the lower end of the market will be difficult to sustain without a resurgence in first-time buyer numbers.
“Against this backdrop some commentators have suggested that affordability for first-time buyers is so stretched, with the house price to earnings ratio at 5.5, that a fall in prices is inevitable. At a simplistic level, a move in the house price to earnings ratio back to its long term average would imply a fall in
house prices of nearly a third, whilst a 1980s style collapse would mean prices falling c. 50%.
However, care needs to be taken when using the long term average house price to earnings ratio as a benchmark given that we would expect the ratio to trend upwards over time. Reasons for this include the decline in real interest rates since the 1980s, housing being a luxury good, people viewing housing as a better investment than pensions and the fall in nominal interest rates (which may have boosted prices as a result of an easing of credit constraints). Furthermore, as the Barker review noted, the
response of housing supply to demand changes has been weak recently.
“Additionally, given the current economic climate it is not clear what the trigger for price falls would be. Back in the 1980s the collapse in prices came about following a sharp rise in interest rates (from 7.4% in mid 1988 to c. 15% two years later) and a 1.4m increase in unemployment at a time when the
economy was slowing. Some have suggested that a sharp change in sentiment in the buy-to-let market causing a large sell off could trigger price falls, but in overall terms and in most regions the secto remains relatively small.
Market to cool in second half of the year…
“Our expectation remains that prices will rise a further 8% over the remainder of the year, taking the increase in prices to 15% in 2004. The economy is set to stay supportive to the housing market with unemployment remaining low and confidence relatively high. However, muted underlying income growth (income excluding bonuses), gradually rising interest rates and buyers downgrading expectations of future house price growth will cause the market to naturally cool over the second half
of the year. We expect interest rates to rise to 4.75% by year end which would take initial mortgage payments for the typical buyer to 32% of take home pay, compared to 27% now and the peak of 39%in the early 1990s.
…but high real debt burden could lead to period of stagnation
“However, the pace of price growth we are expecting this year is clearly unsustainable given that affordability has become so stretched. The 15% rise in prices we are expecting during 2004 partly reflects buyers taking on higher levels of debt in response to lower nominal interest rates. In the current low inflation environment, real debt burdens will be slow to erode. Given this, borrowers need to take a prudent approach to the amount of debt they take on. Highly indebted home owners will find it harder to trade up, potentially meaning the market silts up. Price adjustment would result from the market entering a period of calm, involving low house price inflation and low transaction levels. Such an adjustment process, the ‘soft landing’, is often viewed as benign but it is likely to involve several years of stagnation with buyers on average earnings struggling to get a foot on the property ladder”.
