The Nationwide House Price Report 8 September 2007
1 The Nationwide House Price Report has revealed that, while house price growth rose by 0.6 per cent during August 2007, the annual rate continued to moderate, falling to 9.6 per cent from 9.9 per cent in July.
2 The report showed a typical property cost an average of £183,898 in August, £16,177 more than one year ago.
3 While the US non-conforming crisis has caused turmoil in the international financial markets, Nationwide said it was unlikely to have a significant additional effect on the rate of house price growth in the UK in the short term.
4 However, the report said the dependence of the UK economy on financial services posed a longer term risk.
5 Nationwide stated it still expected house price growth in 2007 to come close to the middle of its forecasted range of between 5 and 8 per cent.
6 It said the expected slowing of the market would result from three factors: weaker affordability; the effect of higher rates and inflation on consumers’ pockets; and lower house price expectations.
7 Fionnuala Earley, Nationwide’s group economist, said: “While it has taken some time for these factors to bite, there are now clearer signs of slower demand in the market.”
8 She added that the stock-to-sales ratio predicted a continued slowing in the annual rate of house price inflation.
9 It was felt that the long-term severity of the fallout from the US non-conforming debacle on the housing market would depend on the length of time it takes for market jitters to abate.
10 Nationwide said a prolonged financial market downturn would be uncomfortable for the overall economy.
11 It added such a downturn would not only affect investment bankers, but would also have negative knock-on effects for legal, accountancy and other professional services that have benefited from the structured credit boom.
12 Earley said that the impact on London property prices could only be negative compared to the current situation, particularly at the top end.
13 However, employment generated from Olympic and other infrastructure investment along with supply issues would remain positive factors.
14 She stated that the overall extent of any damage to economic growth and the housing market would depend on the length of the credit crunch and the response by the Bank of England.
15 The August Inflation Report suggested a rise in the Base Rate to 6 per cent was inevitable, but this is now in doubt.
16 The Bank’s forecast of inflation did not predict a drop below the 2 per cent target at any point over the next two years, even with rates rising to 6 per cent. Yet, inflation fell to 1.9 per cent in July.
17 Added to this was the suggestion that the economies of the UK’s main European trading partners were weakening alongside a likely slowdown in the US.
18 The Monetary Policy Committee (MPC) had been using the strength of global and eurozone growth as an factor to support its tightening campaign.
19 Given these factors, together with the softer tone the last MPC minutes reflected, Nationwide believes rates will now remain at 5.75 per cent.
20 Earley said: “The Bank’s reluctance to intervene in the markets in the same way as the Fed and the European Central Bank suggests that at the moment it is fairly sanguine about the lasting effects of the credit crunch. The longer the squeeze continues, the more likely it is to have a dampening effect on the economy and hence the outlook for house price growth next year.”
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