· House prices rose 0.4% in January
· Period of stability to bring price conscious buyers back to the market
· Upward pressure on house prices to be maintained through rising household numbers despite Prescott’s action plan
January 2005 December 2004
Monthly index (seasonally adjusted) Q1 '93 = 100 308.4 307.0
Monthly change (seasonally adjusted) 0.4% -0.2%
Annual change 12.6% 12.7%
Average price £151,757 £152,623
Commenting on the figures Alex Bannister, Nationwide 's Group Economist, said: “The price of the typical property rose 0.4% (seasonally adjusted) in January. Prices have now been
broadly stable for six months with prices rising by an average of just 0.25% per month over the period.
This contrasts with the previous six months when prices rose by an average of 1.7% per month. As a result of January’s price increase, the annual rate of house price inflation eased slightly to 12.6% from 12.7% in December. The price of the typical house now stands at £151,757. Turning point for sentiment to bring price conscious buyers back to the market “Since last summer the focus of homeowner and would-be homeowner concern appears to have shifted from ‘how high interest rates will rise’ to the future direction of house pric es. Consequently, it is increasingly a buyers’ market with prospective buyers staying on the sideline until the outlook becomes more certain. However, with prices having been broadly stable for six months and the
market nearing the end of the usual seasonal lull, there are indications that sentiment may be about to turn more positive.
“By June 2004 the Monetary Policy Committee had raised the base rate four times in just eight months.
It was at this point, following successive increases in May and June, that market expectations for future rates peaked with the market believing the base rate was set to rise to 5.5-5.75% by mid-2005. The base rate rose again in August but since then rates have been on hold and many in the financial markets believe the interest rate cycle has peaked. The slowdown in the housing market since August
has played a part in altering the interest rate outlook. However, the rapid move from an environment where prices were rising by 1.5-2% per month to one where prices have been broadly stable has led to increased uncertainty about the outlook for house price inflation.
“As a consequence, activity has slowed sharply. The number of house purchase mortgages approved fell to just 77,000 (seasonally adjusted) in November. This was the lowest level since September 1995. However, the introduction of mortgage regulation may have temporarily depressed reported activity.
We expect activity levels to return to around 90,000-100,000 cases per month in the coming months.
“Whilst increased confidence about the outlook will bring buyers back to the market, they will be more price conscious than in recent years. Higher activity levels and improving sentiment should help underpin current property valuations but they are unlikely to reignite rapid house price inflation. We continue to expect small price rises in some months and small falls in others, with prices rising by 2% during 2005 as a whole.
Interest rates are likely to peak at 5% in spring or summer 2005
“Financial market expectations are for rates to remain on hold for some time to come. However, “market analysts are evenly split as to whether the next move in rates will be up or down. Our view
remains that the MPC is likely to raise the base rate to 5% in the spring or early summer and that this will represent the peak in the interest rate cycle. Given that much media reporting has focussed on the possibility of rates being cut, a quarter point rise might surprise many homeowners. However, whilst a
further rise in rates would not help borrowers, a peak of 5% would be low by historical standards. Initial mortgage payments as a percentage of take-home pay would rise to 31%, compared to 39% at their peak in the early nineties.
“The fact that we believe house prices will remain stable during 2005 whereas the MPC is forecasting moderate falls is one reason why we expect rates to move higher. In addition, the tightness of the labour market (the employment rate at 74.8% is nearing a 30-year high) has meant that wage pressure
has been building. Underlying earnings growth reached 4.4% in November up from 3.4% a year earlier. Despite CPI inflation being at just 1.6%, inflation as measured by the RPI, which is still being used as the basis for many pay negotiations, is running at 3.5%. This is likely to feed through to pay
settlements in coming months and push earnings inflation above the level generally accepted to be consistent with the 2% inflation target.
Pressure on the dwelling stock set to continue
“A recent Government announcement outlined plans aimed at delivering a step-change in the rate of new build. This
includes a new first-time buyers initiative using publicly-owned land for new homes and delivering 1.1 million new homes in the
wider South East by 2016. The announcement follows on from the Barker Review which concluded that to reduce
the trend in real house price inflation to 1.8%, the rate of new build would have to be increased by around 70,000 homes per
annum to around 195,000 per annum. However, it is not clear whether the Government’s targets will be met given
growing resistance amongst some groups.
“Consequently, it is likely that house prices (especially in the South East) will remain underpinned by pressure on the housing stock. We estimate that over the last six years the number of households in Great Britain has risen by more than 1 million and currently stands at around 25 million. Between 1999
and 2003 the housing stock rose by an average of 160,000 per year and we estimate that it currently stands at around 25.4 million. However, between 2001 and 2003 the housing stock rose by just 149,000 dwellings per year.
“As chart 1 shows, if this trend were to persist the number of dwellings would fall below the projected number of households by 2010. We estimate that more than 190,000 new properties were built during
2004 and despite the slowdown in house price inflation, indications appear to be that the building industry intends to complete at least this number during 2005. However, despite plans to increase the rate of new build over the medium term, the gap between the number of dwellings and the number of
households is likely to narrow further, maintaining the upward pressure on house prices.”
Note: Housheold projection based on latest (pre-2001 census) projection but adjusted for the latest official population projections. Dwelling stock projection assumes 149,000 addition to stock per year, which was the average addition for the period 2001-2003 Projection
