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| THURSDAY 1ST SEPTEMBER 2005 |
 NINE
YEAR LOW IN UK HOUSE PRICE GROWTH
The annual rate of house price inflation is now 2.3%, compared
to 2.6% last month and 18.9% at this time last year. This is the slowest
rate of annual growth since May 1996, according to figures from Nationwide
today.
Prices in the three months to August increased by 0.3% and the price
of a typical house in the UK is now £157,310 compared to £153,743
this time last year, said the lender.
House prices increased in eight out of the last twelve months, but the
general path of house price inflation continues to be soft. Prices fell
by 0.2% in August, reversing July’s increase and continuing the
gentle slowdown seen since the start of the year.
Nationwide group economist Fionnuala Earley said: "In spite of
a fair deal of bearish comment, the housing market has remained quite
resilient this year following last year’s interest rate hikes."
"Price inflation has slowed gradually, but is still positive, and
activity has been creeping up since the end of 2004. The current levels
of monthly house purchase approvals, estimated at 97,000 in August, are
now higher than at this time last year."
"Expectations of house prices are an important factor in transaction
decisions and current data shows that consumers expect a continued controlled
slowdown, with some modest falls in house prices next year. These expectations
are now feeding into the market as estate agents report sellers adjusting
their asking prices. This, along with the cut in interest rates, has
made it more of a buyers’ market which has led to increased numbers
of buyer enquiries and increased optimism about sales from estate agents."
While market activity seems to have stabilised, this does not signal
the start of a further period of sustained growth in house prices, warned
Fionnuala Earley. "Even though wage inflation is almost twice the
rate of house price inflation, affordability is still an issue, particularly
for first-time buyers, and it will take some time for the balance to
be redressed," she said.
The first-time buyer house price to earnings ratio is significantly
higher now than at the last peak. Even with lower mortgage rates, mortgage
repayments absorb about one third of take home pay and the average first
time buyer now needs to raise a deposit of almost £17,000 compared
to around £11,000 in 2003 – more than a 50% increase in two
years.
In terms of a proportion of gross annual income, a first time buyer’s
deposit now accounts for 62% of gross annual pay compared to 20% sixteen
years ago. However, this reflects that first-time buyers now borrow a
smaller proportion of the purchase price than they did in 1989. This
shows how ability to pay criteria, such as income multiples, constrain
the amount that they can borrow.
Because of these higher deposits, it would now take a first time buyer
almost three and a half years to save a deposit compared to just over
one year in 1989.
"Such comparisons of affordability between these two high points
in the cycle at first seem startling," said Fionnuala Earley. "But
on the other hand, given that nominal interest rates are significantly
lower, the debt burden is not as fierce. Mortgage payments account for
31% of take home pay now, compared to 35% then. In cash terms the average
first time buyer now pays £518 per month, compared to £261
then. In today’s money this equates to £436 - about 20% less
in real terms than now. But this is ignoring the impact of tax relief,
which was still available in 1989."
Without this subsidy the equivalent figure in today’s prices would
be £552. To put this in context, average first time buyer house
prices have increased by 161% in the same period and the average mortgage
size by 138%.
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