House prices 'unseasonably strong'

This brought the annual rate up to 8.2 per cent.

Commenting on the figures Fionnuala Earley, Nationwide's group economist, said: “Just like the weather, the housing market was unseasonably warm in September as August’s interest rate hike did nothing to cool the rate of house price inflation.Its the fastest annual rate of growth since February 2005. A weak patch this time last year, when prices fell by 0.2 per cent, exaggerates the annual increase, but the more recent three-month-on-three-month series still shows a clear pick up in price growth since July. The price of a typical house is now £169,413, almost £13,000 more than at this time last year and the equivalent of a rise of more than £35 per day over the last 12 months.

Demand in the housing market seems firm

“Housing market demand strengthened again in July with house purchase approvals reaching 120,000 – almost 20 per cent above the long term trend. Buyer interest remains robust as estate agents continue to report strong enquiries. However, fewer sellers willing to put their properties on the market is adding to already squeezed supply, which increases price pressure. High prices and little room for price negotiation could mean that many of these new enquiries do not come to fruition, but up until now new buyers have found both the appetite and the ability to overcome the affordability hurdle.

“Buy-to-let landlord demand looks to remain strong for some time to come. Around two-thirds of existing landlords have plans to extend their portfolios and many have access to finance from gearing their existing portfolios. Loan-to-value ratios on buy-to-let lending (including remortgaging) has drifted up since the start of 2005. In the first half of 2006, almost two-thirds of gross buy-to-let lending was at a loan-to-value ratio of 80 per cent or more, compared with only 41 per cent in the first half of 2005.

“Owner-occupier borrowers are also managing to overcome the financing hurdle. Many reports suggest that parents and family are increasingly funding deposits for their children. Nationwide analysis of mortgage lending data suggests that borrowers increase their borrowing by around 10 per cent when remortgaging. Based on a typical house purchase two years ago remortgaging now would release around £11,500 which, if used to help an average first-time buyer onto the housing ladder, would leave them only having to find a further £2,300 to fund a 10 per cent deposit. As raising the deposit, rather than meeting the mortgage payment, is the biggest hurdle to first-time buyers, such a helping hand goes a long way.

Tenant demand is strong…

“There is clearly a significant increase in tenant demand in the UK coming from the large influx of immigrant workers across the whole of the UK. There are also other, typically younger, households choosing rental as a lifestyle choice. However any move away from owner occupation as the tenure of preference in the UK is likely to take a very long time. Price is likely to be the major factor in the fall in ownership aspiration among the young in the short term. Over a longer time horizon, around 75 per cent of younger people still want to be homeowners, even among the youngest group. So, as long as interest rates mean that debt servicing costs are relatively low, those who can raise a deposit will still want to buy, especially if they expect house prices to continue to increase.

…but it can still be cheaper to buy than to rent

“A comparison of the cost of servicing a mortgage loan against rental costs for similar properties show that it can still be cheaper to buy than to rent at current mortgage rates, but usually only on an interest only basis. The typical loan-to-value ratio for a first-time-buyer is 90 per cent. Based on this, mortgage rates would need to increase to around 7 per cent before monthly outgoings on a mortgage exceed rent. However, if the comparison is made on a repayment basis the situation is quite different and debt servicing costs are generally higher than rent, even at current mortgage rates.

“We expect interest rates to be increased again in November, but there is little chance that mortgage rates will increase to 7 per cent as a result. However, increases in interest rates do affect expectations about future house price growth and hence house purchase decisions. While the Nationwide Consumer Confidence Survey shows that consumers still expect prices to increase over the next six months, the expected rate of increase is fairly modest and has fallen in recent months. Lower house price growth means less of a cushion for buyers, especially those on interest only loans, and will make them more reluctant to stretch themselves. This may signal that demand will now begin to cool, particularly as other costs such as utility bills increase sharply.”