The latest Nationwide property index published today (Thursday March 31) shows that prices have increased 0.6% on a quarterly basis and are now 0.1% higher than a year ago. Prices have not risen slightly for three of the past four months.
‘The outlook remains uncertain, but all things considered, this is unlikely to mark the beginning of a strong upturn in prices. The economy entered a soft patch at the back end of 2010, and there have been few signs of a strong bounce back. The jobs market remains challenging and Nationwide's Consumer Confidence Index suggests that sentiment has fallen to an all time low in recent months,’ said Robert Gardner, Nationwide's chief economist.
‘While demand is likely to remain fairly soft, a rapid increase in the supply of properties also appears unlikely. Low interest rates and a stabilisation in labour market conditions have prevented a rise in forced selling, and the subdued market outlook is deterring many sellers from entering the market,’ he explained.
‘With the economic recovery expected to remain sluggish, the most likely outcome is that the property market will follow suit, with low transaction levels and prices moving sideways or modestly lower through 2011,’ he added.
He also said that interest rates will play a key role in the recovery of the housing market. The Bank of England is likely to start the process of returning interest rates to more normal levels at some point in 2011.
‘Rate increases may exert more of a drag on the household sector than would have been the case before the recession. Households are more sensitive to rate increases. Mortgages account for around 85% of household debt and since 2008 the proportion of mortgages on variable interest rates has risen sharply, from 48% to 62%,’ said Gardner.
‘Ultimately, the key factor determining the impact of higher interest rates on households is the economic backdrop against which it takes place. If the rise in interest rates is gradual and occurs when the economy is recovering strongly and the labour market is strengthening, then the impact on households and the housing market should be fairly modest,’ he explained.
‘However, still high levels of debt and the increased share of variable rate mortgages suggests increased grounds for caution, since the household sector is likely to be more sensitive to interest rate increases. This is an important consideration, after all, households account for over 60% of spending in the economy, and the recovery remains fragile,’ he added.
Although more households may choose to switch to fixed rate mortgages in the quarters ahead, reducing the sensitivity to rate rises. But Gardner points out that the incentive is blunted by the fact that the rates on fixed rate deals are often higher than the variable rate people are currently on. ‘This is because the cost of fixed rate mortgages is linked to longer term interest rates, which are higher than the Bank Rate. Moreover, the differential may widen further in the months ahead long-term interest rates may move up more sharply than the Bank Rate as investors anticipate further interest rate increases ahead,’ he explained.
