Nationwide: House price rises continued in June

Interesting statistics confirming the monthly and quarterly price increases.  Also highlighting London as benefitting from the strongest rebound.

• House prices rose by 0.9% in June
• Three month rate of change turns positive for first time since December 2007
• Low supply supporting prices for now, but a sustained recovery still faces risks

Headlines June 2009 May 2009
Monthly index * Q1 ’93 = 100 307.6 304.9
Monthly change* 0.9% 1.3%
Annual change -9.3% -11.3%
Average price £156,442 £154,016
* seasonally adjusted

Commenting on the figures Martin Gahbauer, Nationwide’s Chief Economist, said:
“The price of a typical house rose by a seasonally adjusted 0.9% in June, building upon the improving trend seen
over the last several months. At £156,442, the average house price across the UK was still 9.3% lower than a
year ago, but this marks the first time since July 2008 that the year-on-year fall has been in single digits. The
three month on three month rate of change – a smoother indicator of the short-term price trend – turned positive
for the first time since December 2007 to stand at 0.9%, up from -0.4% in May. If the pattern of price
movements seen in the first half of the year is repeated over the second half, then prices could show only a small
single digit fall for 2009 as a whole. This would represent a stark shift from trends seen at the turn of the year,
when most indicators were pointing to a repeat of the large declines seen in 2008.

Prices have stabilised despite very low house purchase activity
“House prices have now risen in three of the last four months, suggesting that the improvement that began to
show up in March represents more than just statistical noise. What is unusual about the recent trend reversal,
however, is that it has taken place against a background of transactions activity that is still very low by historical
standards. Although it has risen from the all-time record low reached in November 2008, the industry-wide
number of mortgages approved for house purchases is still 55% below its long-run average and 33% below the
trough reached in the 1990s downturn. Normally, such a low level of house purchases would be associated with
falling house prices. Alongside the low level of mortgage approvals, however, there continues to be a relentless
drop in the stock of property available for sale, as potential sellers and builders have responded to depressed
demand conditions by reducing the supply of property coming onto the market. As a result, prices have been able
to stabilise even in the face of very low demand.

Price recovery still faces significant risks
“While it is encouraging to see that prices are no longer seeing steep falls, there are still many obstacles in the
way of a genuine and sustainable price recovery. To begin with, abnormally low supply levels are unlikely to last
forever, as the recent price increases should make previously hesitant sellers feel more confident about marketing
their properties. Additional supply is also likely to come from homeowners who see their financial position
impacted by higher unemployment and lower incomes. With the stock of property available for sale likely to
eventually increase, house purchase demand will need to rise more convincingly from current levels to prevent a
possible relapse in price levels.

“At first sight, there is quite a lot of room for demand to rise further, given that the current level of transactions is
still well below the historical average. However, there are good reasons to be cautious about expecting a swift
recovery to pre-crisis norms. Firstly, although estate agents have been reporting a steady rise in the number of
buyer registrations for some time now, this increase in the enquiry pipeline has not yet led to large increases in
transaction volumes, because credit criteria remain significantly more restrictive than in the years leading up to
the downturn. Rising unemployment and associated job insecurity are also limiting the extent to which enquiries
can translate into actual transactions. “Another factor that is vital to demand levels is housing affordability. Following the house price and interest rate declines of the last two years, initial mortgage affordability as a percentage of take home pay is now slightly below its longrun average, suggesting that housing valuations have returned to a more normal level. Initial affordability, however, does not take into account the fact that interest rates may rise over the lifetime of a mortgage. With interest rates currently at unusually low levels, initial affordability may therefore be painting a somewhat misleading picture of the true position. This is highlighted by the fact that the simple house price to earnings ratio – which does not depend on the current level of mortgage rates – is still some way above its long-run average. The recovery in housing demand could therefore easily stall if and when interest rates begin to rise again. Although base rate is unlikely to increase in the near future, the money market swap rates that determine fixed rate mortgage pricing have already begun to increase in anticipation of an economic recovery and in response to record levels of government bond issuance.

“On balance, the stabilisation of house prices is a welcome surprise that did not seem likely at the beginning of
the year. However, there are still considerable headwinds facing the demand side and until we see a more robust
recovery in house purchase activity, it is too early to be confident about a full-scale recovery of prices.” (Martin Gahbauer Roy Beale, Chief Economist, Nationwide).

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