UK house prices fell by 0.2 per cent in September.
The annual rate of house price growth in the UK is now 1.8 per cent - its lowest since May 1996
Softer house price growth and lower interest rates have renewed buyer interest and supported activity
House prices are likely to remain stable for some time.
Commenting on the figures Fionnuala Earley, Nationwide's Group Economist, said: "House prices continued to fall in September, reducing by 0.2 per cent for the second month in a row. Since the end of 2004 the monthly data has been relatively mixed, with several months of small falls and rises, but looking at changes over three months shows the underlying trend more clearly. According to this measure, house price growth stalled in the three months to September, with no increase on the previous three months. Yet house prices are still higher than at this time last year. The annual rate of house price inflation is now 1.8 per cent - its lowest level since May 1996. The price of an average house in the UK is now £156,517 compared to £153,727 at this time last year.
Historically high house price to earnings ratios suggest a housing market bubble…
"House price to earnings ratios are significantly above levels of the early 1990s and this relationship alone has led many commentators to predict a bursting bubble and a subsequent housing market crash. Even Gordon Brown described the UK as having had a housing market bubble over the last two years. But experience so far shows no evidence of an imminent crash. Instead, the housing market has remained fairly robust and, as house price growth has softened, buyers have shown renewed interest in the market. "
...but there may be reasons to interpret traditional affordability ratios differently
"Deteriorating affordability has acted as a brake on house price inflation, but the different economic environment now suggests that we should perhaps interpret the traditional ratios rather differently.
In a recent speech, MPC member Steve Nickell suggests that it can be legitimately argued that there has been no housing market bubble. He pointed out three main reasons why we might expect a higher equilibrium house price to earnings ratio in the current economic environment. First, on the supply side the rate of new building is historically low while the rate of growth of households has been strong. Secondly, with low inflation keeping interest rates and thus debt servicing costs low, borrowers do not face the hurdle of exceptionally high borrowing costs in the early years. Instead, the debt servicing burden starts at a lower level, but continues for longer. Finally falls in long term borrowing costs also feed into higher equilibrium house prices."
Buyers return to the market…
"This may help to explain why we have seen a surprisingly swift return of buyers to the market. The number of house purchase approvals increased to 97,000 in July, their highest level for a year and just above the average for the last 12 years. We expect house purchase approvals to remain at around this trend level for the rest of the year, as declining rates of growth of house prices help add liquidity to the market. Estate agents have consistently reported increased buyer interest over the last few months, which should help to support the market going forward.
The lack of forced sales has helped the market to remain steady, but so too has the relatively robust state of the macroeconomy, particularly the labour market. While unemployment has increased for seven consecutive months, employment levels still remain higher than at any time since comparable records began in 1971 and wage growth continues to be positive in real terms. Buyers have also benefited from highly competitive mortgage deals and this has clearly helped buyers to take the plunge."
… but future performance depends on macroeconomic developments
While the equilibrium house price to earnings ratio may have increased, it is unclear whether this is its new natural level and we may still expect affordability to act as a brake on the market for a while to come. More importantly, the future performance of the housing market is closely linked to the performance of the macroeconomy and to consumers’ expectations of future price rises. While house prices and activity have been well behaved, current levels of uncertainty in the macro economy mean that this could change. Economic growth has been cooling since 2003 and is expected to be below trend for the rest of this year and into next. Until now the impact of soaring oil prices has been relatively benign on the global and domestic economy, but hurricane Rita may have more serious implications for future oil prices and economic growth. Providing the labour market remains robust, and mortgage payments remain affordable, the prospects for the housing market remain fairly benign. But as we have said before, confidence is key at this stage in the market. Current indications suggest that consumers are relatively sanguine. Spread betting data suggests that consumers expect prices to be fairly static for the rest of this year and to fall only modestly next year - in the region of around 2 per cent. This is not inconsistent with our view that we should expect a period of unexciting movement in house prices for some time to come."
