But the overall picture is still one of a market treading water. Indeed, the three month on three month measure of house prices, a better measure of the underlying trend, was basically flat in February at -0.1%, the report also shows.
This shouldn't come as too much of a surprise, according to Robert Gardner, Nationwide's chief economist. ‘Housing market trends are closely linked to wider economic prospects. Given that the recovery hit a soft patch at the turn of the year and looks set to remain sluggish in the year ahead, the property market is likely to follow suit, with relatively low transaction levels and prices moving sideways or modestly lower through 2011, he said.
He believes that demand for homes has levelled out, supported by historically low interest rates and some stabilisation in the labour market. The continued uncertain outlook for the economy is likely to keep many potential buyers on the sidelines for some time yet.
‘Nevertheless, there are few signs of a glut of unsold homes building up on the market. Sellers remain reluctant to accept lower prices to secure a sale. In fact there are tentative signs that the volume of homes coming onto the market is slowing,’ he explained.
First time buyers play a crucial role in housing market dynamics. With the supply of housing fixed in the short term, the flow of new buyers into the market has a major impact on prices and activity. Therefore, the fact that first time buyer numbers are well below the levels prevailing before the financial crisis casts a shadow over the outlook for the wider market.
‘Low first time buyer numbers appear to be a function of challenging conditions in the wider economy. Indeed, the proportion of first time buyers has remained fairly constant in recent years and they accounted for around 37% of house purchases in recent months, compared to around 40% in 2007 and an average of 36% in the four years before the financial crisis struck,’ said Gardner.
'This is surprising since, in a number of respects, the headwinds facing first time buyers have been even stronger than for other sources of demand in the housing market. First time buyers tend to be younger, and labour market conditions for younger people have been more difficult. For example, 18 to 24 year olds account for around a fifth of first time buyers and the unemployment rate for this group has increased from 12% in 2007 to over 18% at the end of 2010, while for the population as a whole it has increased from 5.3% to 7.9% over the same period,’ he added.
Affordability remains a major constraint and weak labour market conditions aren’t the only factor at play. ‘In the wake of the financial crisis, mortgage lenders have become more conservative, a shift that has a greater impact on those taking their first steps into the housing market. For example, the average deposit on a home has increased from 10% of the property’s value to 21%. This means that, for an average worker earning an average salary saving 15% of take home pay, it would take eight years to put down a typical deposit to buy the average house,’ he explained.
‘However, the more fundamental issue is that housing is still expensive on a number of metrics, which is keeping potential buyers on the sidelines. House prices are currently around five times average incomes, compared to the long run average of four. A typical mortgage payment for a first time buyer accounts for 30% of disposable income, slightly above the long term average of 29%, even though interest rates are still close to historic lows.
'Part of the reason for stretched affordability lies on the supply side of the housing market. The rate of building has not been sufficient to keep up with the growing number of households in recent years.
‘Looking forward, the number of first time buyers is only likely to increase substantially when labour market conditions strengthen. With the UK economic recovery set to remain fairly modest, the improvement in employment and wages is likely to be slow going. This in turn suggests that first time buyers will be slow to return to the market, further reinforcing our view that the housing market will remain sluggish through 2011,’ he added.
