Nationwide - UK house price falls accelerate in May
The pace of UK house price falls accelerated in May as more weak economic news added to the gathering momentum of negative sentiment about the housing market, according to Nationwide.
House prices fell by 2,5% during the month, the largest recorded monthly fall in the history of the Nationwide monthly index. At seven months, this is also the longest consecutive period of monthly falls since 1992.
Prices have fallen 4,4% since this time last year, the biggest annual fall in house prices since December 1992 when prices were falling at an annual rate of 6,3%. The price of a typical house is now £173,583 (about R2,6m), £8,000 (about R120 000) less than this time last year.
However, the strength of house price growth up until last year means that prices are still 5% higher than two years ago and 10% higher than three years ago.
Commenting on the data, Fionnuala Earley, Nationwide's Chief Economist, says that problems in credit markets have clearly been the trigger for changing fortunes in the housing market. While it is never wise to place too much weight on one data point, the apparent speed of the adjustment may lead the MPC to look more closely at the balance of risks to inflation in the medium term. Stronger than expected inflation appears to have shattered hopes of an early cut in the Bank Rate in June, but more downbeat economic and housing market data could lead more MPC members to join David Blanchflower in voting for pre-emptive cuts.
The decision will be very difficult with new highs in oil prices, but as higher prices of essential items squeeze consumer spending power and housing market weakness weighs down on confidence, the balance of risks to inflation in the medium term could shift enough to lead the MPC to cut rates sooner than the markets currently expect.
Earley says the housing market has not been immune from weaker economic sentiment. Three important data series reported record lows in April. The Bank of England reported a 11% monthly drop in house purchase approvals in March to reach a seasonally adjusted 64 000 - the lowest since records began in 1993. RICS estate agents reported the most widespread regional falls in house prices in the history of their series.
However, we estimate the size of the average fall for the UK
implied by the RICS data was around 2% over the last three months -
consistent with figures from Nationwide. House price expectations
also fell into negative territory, as the
Earley says a further fall in house prices in May was not unexpected, and for most of those not wishing to move house or borrow money secured on it, the fall in value of their home is likely to be of limited concern in the short term.
While the value of our homes is important as security, the most recent falls in prices for most borrowers will have simply eroded some of the large gains that were made over the last few years. While prices have fallen by 4,4% since May 2007, they still remain 5% higher than in May 2006 and 10% higher than in May 2005.
Current market conditions inevitably lead to comparisons with the last episode of falling prices. However there are a number of reasons to believe that todays borrowers are better placed to weather the storm than in the 1990s.
First, fewer homeowners bought at the top of the market in this cycle. A comparison of turnover rates, which take into account growth in the markets over time, shows that a far higher proportion of homeowners bought at the very top of the market in the 1980s.
In contrast the turnover rate at the peak of this cycle was only marginally above the long-term average. This means a much smaller proportion of borrowers face the full effect of falls in prices than was the case in the 1990s.
Secondly, todays borrowers have typically put down a larger
deposit than their 1980s counterparts. While credit conditions have
loosened in the UK housing market over the last few years, lending has
typically remained at lower loan-to-value ratios than was the case in
the 1980s. Of loans made for house purchase (which typically have higher
loan-to-value ratios than remortgages) in 1988-89 - the last two years
of rising prices in the last cycle - 44% of house purchase loans were
more than 90% of the value of the property. In comparison in 2006-07
- the last
Thirdly, a much greater proportion of todays borrowers
have opted to repay capital rather than just interest. In 1988-89 about
85% of loans were on an interest-only basis, reflecting the popularity
of endowment loans at that time. In comparison in 2006-07 only 30% took
out interest-only loans and the majority of borrowers will therefore
have repaid some capital and improved their underlying equity position.
The proportion is even lower for first time buyers too, with only 26%
of those taking loans in 2006-07 choosing an interest-only mortgage.
Article from: www.rodneyhayter.com