Chief economist Robert Gardner said that the data provides some comfort for the property market which is facing a challenging time due to the weak economy and low inventory levels.
Over the last eighteen months, house prices have been fairly stable, despite the challenging economic backdrop. ‘Prices were just 0.7% lower than May last year, even though the UK economy dipped back into recession in the first three months of the year and showed few signs of a significant pickup in economic activity at the start of the second quarter,’ he pointed out.
‘Demand for homes remains subdued on the back of weak labour market conditions, but the lack of homes coming onto the market is providing support for prices. This is in part a reflection of the low rate of building in recent years which has failed to keep pace with household formation,’ he explained.
Housing affordability points to underlying supply issues, especially in the south of the country. House prices remain high relative to incomes, at more than five times average earnings, well above the long run average of four times earnings,’ he added.
But he also said that affordability appears less stretched when comparing the cost of a mortgage to incomes. ‘Repayments on a typical mortgage are equal to around 31% of take home pay, the lowest level for a decade, but this is because interest rates are near three hundred year lows,’ he said.
‘Upward pressure on rents also suggests that demand for housing is outstripping the available supply. As the chart over the page illustrates, rental growth tends to track pay growth fairly closely over time. However, rental growth is now outpacing wage growth by a significant margin,’ he added.
He also said that the index has reached an important milestone as it was first produced in 1952 and shares its 60th anniversary with the Queen who celebrates her jubilee this weekend.
According to Nationwide data the average UK house price has increased from £1,891 to £166,022 during the Queen's reign, that's almost an 88 fold increase over the 60 year period, while the cost of goods and services have recorded a more modest 25 fold increase.
The Nationwide index shows that there was little change in prices from 1952 until the mid 1950s, although prices fell slightly in 1953 and 1954. House prices rose in every single 12 month period for 35 of the last 60 years, from 1955 to 1990.
‘As inflation began rising in the 1960s people began to realise that the easiest way to benefit from high inflation was by owning their own property as it was the one substantial physical asset people were able to acquire by borrowing, and everyone has to live somewhere,’ said Ray Boulger of independent mortgage advisors John Charcol.
In the fourth quarter of 1959 the annual increase reached 5% for the first time and despite some small falls on a quarterly basis there was then an unbroken run of increases in every single 12 month period from the first quarter of 1955 to the second quarter of 1990.
As a result of the mad market in 1988/89 house prices rose at an annual rate of 32% in the first quarter of 1989 and the index, which started at 100 in 1952, peaked at 3,320 in the third quarter of 1989. The market then collapsed, with the index falling 20% in nominal terms by the first quarter of 1993.
‘However, as there was 20% inflation over this three and a half year period the fall in real terms was far higher. After treading water for three years the market started a strong recovery, initially focussed primarily in London and the South, which lasted 11 years, before peaking in the third quarter of 2007,’ explained Boulger.
Between the fourth quarter of 1995 and the third quarter of 2007 prices rose by 262% but have since fallen back 11.6%. ‘Over the last 60 years the price of the typical house which the index measures has risen by a massive 8,680%. Over the same period the Retail Price Index rose by 2,500%,’ added Boulger.
