The average price of a house is now £161,602, down from £162,763 in December 2010 and on an annual basis prices are down 1.1%.
According to Robert Gardner, Nationwide’s chief economist, the property market entered 2011 with a whimper rather than a bang. ‘January’s data does little to alter the picture of a sluggish market that has been evident since the summer.
Indeed, the three month on three month measure of house prices, which is a better measure of the underlying trend, showed a fall of 0.5%, consistent with the gradual moderation in prices that has been in place since the summer of 2010,’ he said.
‘The outlook is still highly uncertain, but the most likely outcome is that the pattern of low transaction levels and prices moving sideways or modestly lower will continue through 2011,’ he added.
The January report shows that demand for homes looks to have stabilised, albeit well below the levels prevailing before the crisis. Interest rates remain at historic lows, and labour market conditions have stabilised and both these factors will provide support to the market, according to Gardner.
‘However, the continued uncertain outlook for the economy will probably continue to keep many buyers on the sidelines. At the same time, there are few signs of a glut of unsold homes building up on the market that would lead to a sharper price correction. Indeed, there are tentative signs that the volume of homes coming onto the market may be slowing,’ he explained.
He also pointed out that Consumer Price Inflation (CPI) was stronger than expected again in December, maintaining what has become a familiar pattern over the last two years and looks set to remain well above its 2% target throughout 2011 as a result of changes in indirect taxes and strong growth in food and commodity prices in global markets.
‘This has led some to question what this is likely to mean, if anything, for the housing market. High inflation readings reinforce the notion that the housing market is likely to remain sluggish in 2011. The main reason is that high consumer price inflation is squeezing household budgets, as wages aren’t rising fast enough to keep up,’ said Gardner.
‘For example, in the twelve months to November, prices increased by 3.2% on the CPI measure, but average wages (including bonuses) rose by just 2% over the same period. Indeed, the rise in inflation has been particularly challenging for households, as recent increases have been focused on essentials like food, transport and utilities, elements where it’s much harder for households to cut back or substitute for other, cheaper alternatives.
‘As a result, the most likely direct impact of continued strong inflation readings is to keep demand for housing subdued, thereby acting as a dampener on activity both in terms of the number of property sales, as well as on prices,’ he explained.
‘Persistent stronger than expected inflation figures also increase the risk of a weaker housing market performance. Higher than expected inflation could prompt the Bank of England to raise interest rates more aggressively than currently expected, or at a time when demand in the wider economy is still fragile.
‘In addition, investors may start to demand a higher return for holding UK bonds, pushing up long term interest rates. Either of these developments could prompt a sharper slowdown in the housing market by putting upward pressure on mortgage costs. However, the risks still seem small at this stage. Investors remain confident that inflation will eventually come back down towards its target level as evidenced by the historically low level of long term interest rates.
‘Similarly, the Monetary Policy Committee (MPC) is not likely to raise rates sharply, as it believes that high inflation is largely the result of a succession of transitory factors, such as higher global commodity prices, and that underlying price pressures in the UK remain well contained. As a result, interest rates are only likely to rise gradually, most likely in the second half of the year. This in turn should have only a relatively modest impact on the housing market, especially since it is likely to take place against the backdrop of a strengthening economic recovery,’ he added.
