Housing market set to cool?

Latest figures (January) from the Nationwide Building Society show the first signs of cooling to emerge in the housing market - prices rising by just 0.3% during the month. And that's the lowest increase for 8 months. The year-on-year rate meanwhile has fallen to 9.3% (10.5%) and the average cost of a property retreated to £173,225 (£173,746).

Fionnuala Earley, Nationwide's Chief Economist, says that whilst 2007 started off with a bang as the Bank of England raised interest rates for the third time in six months only time will tell how much the surprise decision will affect sentiment in the housing market.

Earley says that the slowdown in the rate of house price growth adds to the growing list of cooling indicators. Estate agents reported some easing of demand in December and January. In addition, the number of newly agreed sales is rising more slowly and the length of time properties are on the market seems to be getting longer. More importantly, new buyer enquiries recorded their first fall in 19 months.

While the correlation with mortgage approvals isn't perfect, says Earley, it suggests that the 129,000 house purchase approvals recorded in November may have been the peak. And it's likely that there will now be a weakening in demand as a result of stretched affordability and rising interest rates.

"Of course, prices are determined by supply as well as demand. For now, supply, as measured by new instructions for sale of properties with estate agents, is actually falling more quickly than demand and this puts upward pressure on house prices.

"As a result, estate agents are still reporting firm house price gains and an expectation of more to come. However, eventually the slower demand will ease the rate of house price growth to more sustainable levels," she notes.

Earley concludes that the market should remain fairly stable but slow a bit more quickly than initially expected. "This would bring our expectation of house price growth in 2007 into the lower end of our 5% to 8% forecast," she says.

30 January 2007 © Moneyextra.com

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