*The annual rate of growth remained positive, but slowed to 2.3 per cent.
* Activity remains fairly stable but with signs of increased buyer interest
* Expectations of house prices are consistent with a continued controlled slowdown
Headlines August 2005 July 2005
Monthly Index*: Q1 '93=100 311.0 311.6
Monthly change*: -0.2 per cent 0.2 per cent
Annual change: 2.3 per cent 2.6 per cent
Average price: £157,310 £158,348
* seasonally adjusted
Commenting on the figures Fionnuala Earley, Nationwide's group economist, said: "House prices increased in eight out of the last twelve months, but the general path of house price inflation continues to be soft. Prices fell by 0.2 per cent in August, reversing July’s increase and continuing the gentle slowdown seen since the start of the year. Prices in the three months to August increased by 0.3 per cent and the annual rate of house price inflation is now 2.3 per cent, compared to 2.6 per cent last month and 18.9 per cent at this time last year. This is the slowest rate of annual growth since May 1996. The price of a typical house in the UK is now £157,310 compared to £153,743 this time last year.
"In spite of a fair deal of bearish comment, the housing market has remained quite resilient this year following last year’s interest rate hikes. Price inflation has slowed gradually, but is still positive, and activity has been creeping up since the end of 2004. The current levels of monthly house purchase approvals, estimated at 97,000 in August, are now higher than at this time last year. Expectations of house prices are an important factor in transaction decisions and current data shows that consumers expect a continued controlled slowdown, with some modest falls in house prices next year. These expectations are now feeding into the market as estate agents report sellers adjusting their asking prices. This, along with the cut in interest rates, has made it more of a buyers’ market which has led to increased numbers of buyer enquiries and increased optimism about sales from estate agents.
"However, while market activity seems to have stabilised, this does not signal the start of a further period of sustained growth in house prices. Even though wage inflation is almost twice the rate of house price inflation, affordability is still an issue, particularly for first-time buyers, and it will take some time for the balance to be redressed.
"The first-time buyer house price to earnings ratio is significantly higher now than at the last peak. Even with lower mortgage rates, mortgage repayments absorb about one third of take home pay and the average first-time buyer now needs to raise a deposit of almost £17,000 compared to around £11,000 in 2003 – more than a 50 per cent increase in two years. In terms of a proportion of gross annual income, a first-time buyer’s deposit now accounts for 62 per cent of gross annual pay compared to 20 per cent sixteen years ago. However, this reflects that first-time buyers now borrow a smaller proportion of the purchase price than they did in 1989. This shows how ability to pay criteria, such as income multiples, constrain the amount that they can borrow. Because of these higher deposits, it would now take a first time buyer almost three and a half years to save a deposit compared to just over one year in 1989.
"Such comparisons of affordability between these two high points in the cycle at first seem startling. But on the other hand, given that nominal interest rates are significantly lower, the debt burden is not as fierce. Mortgage payments account for 31 per cent of take home pay now, compared to 35 per cent then. In cash terms the average first-time buyer now pays £518 per month, compared to £261 then. In today’s money this equates to £436 - about 20 per cent less in real terms than now. But this is ignoring the impact of tax relief which was still available in 1989. Without this subsidy the equivalent figure in today’s prices would be £552. To put this in context, average first-time buyer house prices have increased by 161 per cent in the same period and the average mortgage size by 138 per cent.
"Having breached the £1 trillion threshold in the Spring of last year, household debt in real terms is now more than twice the level than at the last housing market peak. This makes households more vulnerable to changes in the economy.
"In the short term, the main macroeconomic drivers remain robust. The decision of the MPC to reduce rates was widely predicted, but the closeness of the vote was not. While consumption demand has been weak, the recent data suggests that overall economic performance may not have been so bad. Inflation, retail sales and employment data were all more buoyant than market predictions – a very different picture to the gloomy commentary around at the start of the month. In addition, confidence indicators have held up well. Nationwide’s own consumer confidence indicator showed a return to stronger levels as the gloomy scenarios predicted earlier this year did not materialise. But even though these indicators look quite positive, there is still downside risk should consumer spending not recover.
"In the housing market the current background suggests that the market will continue to cool in a contained fashion, but it will be some time before we can expect prices and activity to return to the growth rates seen in the last two years. Lower interest rates are a reflection of lower inflation and while lower rates mean that borrowers can afford to service higher levels of debt, lower inflation means that it takes longer for the real value of that debt to erode. We can therefore expect a sustained period of unexciting movements in house prices before consumers’ financial balance sheets are restored to more comfortable levels."
