• Pace of growth eases with 0.9% rise in price of average UK house during June
• Wales and the North see prices rise by a third over the last twelve months
• Forecast for 2004 remains at 15%
Commenting on the figures Alex Bannister, Nationwide's Group Economist said: "The monthly rate of house price inflation eased slightly in June, with the price of the average house rising 0.9% in the month, down on the 1.7% rise during May. June’s price increase took the annual rate of house price inflation to 19.1%, meaning that the price of the average house now stands at £151,524; which is more than double the price at the start of the new millennium.
"Compared with recent quarters, the pace of house price growth across the country is now more even; with the annual rate of inflation picking up in London (up to 11% year-on-year from 6% last quarter) and the South-East (up to 13% year-on-year from 10% last quarter). The pick up in price growth in the capital and the Home Counties partly reflects an improving jobs market. At the top end of the price growth table are the North and Wales, with prices in both regions increasing by a third over the last twelve months. Whilst strong price rises in these regions are partly explained by better than average affordability in terms of the ratio of house prices to earnings, buyer confidence and expectations of further price rises are also likely to be playing a role.
"In Scotland, the upward surge in house prices continued into the second quarter, with the 24% annual increase taking the price of the average house above £100,000 for the first time. Prices in Northern Ireland also breached the £100,000 mark following a 14% increase for the year. At a local level, the areas seeing prices rise fastest are predominantly in the North and Wales — including Hartlepool, Allerdale, Barrow-in- Furness, Gateshead and Sedgefield in the North, and Swansea, Powys and Gwynedd in Wales. Price growth was once again slowest in some of the more expensive areas of the country including Tower Hamlets, Wycombe, Winchester, Epsom, Windsor and Maidenhead.
"Our forecast for house price inflation in the 12 months to December 2004 remains at 15%. Over the first six months of this year prices have risen by just under 10%, or around 1.5% per month. Underlying our forecast is a considerable slowdown in this pace of growth to an average of 0.75% per month for the remainder of the year in response to higher interest rates, worsening affordability, reduced demand for buy-to-let and a downgrading of buyers’ expectations of future price growth. Although the combination of rising capital values and declining rental values has put downward pressure on rental yields in all areas, we do not expect a rapid release of properties on to the market in the event of a change in sentiment. Many buy-to-let investors are likely to remain in the market for the long-term.
"Debate about the housing market outlook has intensified following comments made by the Governor of the Bank of England. In testimony to the Treasury Select Committee, when asked about the sustainability of house prices, Mervyn King said that he thought it likely that house prices are now above their sustainable level and quite possibly significantly above their sustainable level. He believed that the chances of falls in house prices are greater than they were. He admitted that he didn’t know where house prices will go but nor does everyone else and that it would be unfortunate if people were encouraged to make decisions on the very risky assumption that house prices can only ever go upwards. He went on to say that like any asset, house prices are more volatile than general inflation.
"Buyer confidence and expectations are undoubtedly playing a significant role in the current cycle. Although the way in which buyers form their expectations about future price growth is complex, the Governor’s comments are likely to have led to a downgrading of expectations. "Whilst we would concur with the majority of the Governor’s comments, we believe that the most likely conclusion to the current housing market cycle is a long drawn out period of slower house price inflation and low housing market activity, as opposed to a slump in prices. Buyers assuming that 5-10% annual house price growth will be the norm over the coming years are very likely to be disappointed. It is possible that certain areas of the country will see no growth in prices over the coming years.
"Nevertheless a repeat of the late eighties slump in prices looks unlikely. Although Mervyn King’s comments may knock confidence, whilst the economic fundamentals remain positive we would expect this to result in a slowdown in price growth as opposed to widespread falls. Worsening confidence underpinned by robust economic fundamentals led to prices in many London boroughs treading water during 2001 (and during 2002 and 2003 in some boroughs). In contrast, house prices fell at the end of the eighties cycle following a marked worsening in economic conditions. Interest rates rose sharply in response to rising inflation and many people lost their jobs as the economy headed in to recession. The current economic outlook remains positive and although rising rates are likely to act as a brake on the market, we do not foresee economic triggers arising that might cause widespread and sustained price falls."
