Commenting on the figures Fionnuala Earley, Nationwide's group economist, said:
“House prices grew by 0.3% in June, the third consecutive month of flat growth. The three monthly growth rate clearly shows the slowing trend in house price inflation since March. Prices increased by 1% in the three months to June, compared with 1.6% to May and 2.1% in the three months to March. The annual rate of growth increased slightly to 5% in June, but only because there was a fall of 0.1% this time last year. The price of a typical house is now £165,730, around £8,000 more than this time last year and equivalent to a rise of almost £22 per day.
Stable interest rate outlook...
“The macroeconomic and interest rate outlook seems fairly stable. Growth is strengthening and while unemployment increased for the fourth successive month in May, there are still increasing numbers of people in work. The latest set of minutes from the MPC was full of “ifs” and “somewhats” illustrating the significant, yet finely balanced risks to inflation and hence interest rates. While financial markets are still pricing in an increase in rates by the end of 2006 and a further increase in 2007, the tone of the MPC was very measured, suggesting that they are still in wait and see mode and that interest rates are likely to remain at 4.5% for some time to come.
… and steady demand will support house prices…
“Estate agents’ and house builders’ data record buyer and seller interest at the start of the house buying process. These show signs of more buoyant demand in May after a weak April. This could be a response to faster house price growth through the spring, and may support further price rises in the short term. However, focus on the World Cup may mean lower activity in June which would seem more in line with house purchase approvals data from the Bank of England which has shown a softening trend.
“However, while demand seems fairly stable, the deterioration in affordability and its likely impact cannot be ignored. Mortgage payments for someone on average earnings now take up around 42% of take home pay compared with around 32% three years ago. While earnings growth remains lower than house price growth the ability to pay constraint will continue to bite. So too will lending constraints in terms of income multiples and LTV limits, especially for young first-time buyers.
… but supply is the real key to the longer term.
“At current assumed rates of household formation there is already excess demand for housing in England, regardless of the tenure. Given that around 80% of people in the UK aspire to home ownership and the current rate of ownership is 71%, there is most pressure on the owner-occupied sector.
At current rates of house building there will continue to be significant undersupply of housing at the assumed household formation rates. Not all of this is in the owner-occupied sector, but as this and the private rented sector together account for around 80% of all tenures, it is clear that there is a significant amount of pent-up demand which will help to support house prices into the future. At current rates of house building there could be over 100,000 frustrated potential households in 2006 even on central assumptions of migration. At the higher migration assumptions this increases to over 200,000.
Affordability issues make renting attractive, in spite of costs.
Private rental has become a more important tenure, primarily as local authorities have moved out of housing provision. However, as affordability affects the ability to purchase, rental becomes a more attractive proposition for potential owner-occupiers. While paying rent may still be more expensive than mortgage payments, raising the deposit and meeting lenders’ income multiple requirements may mean that rental is the only option in the short term. Investment in private rental accommodation has also become more attractive in recent years. There is some suggestion that low yields elsewhere have led investors to residential property, perhaps boosted by fears about pensions. In addition, financing has become easier as more lenders have entered this market and lending criteria have modified with experience. Ironically, competing demand from landlords for desirable property will put further pressure on prices for these aspiring home-owners.
