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Latest housing market data from the Nationwide Building Society shows house prices falling by 1.1% in April. That's the sixth straight month of losses. More importantly - at least from a psychological standpoint - prices showed their first year-on-year decline since March 1996. Meanwhile, the average price of a home now stands at £178,555 (£179,110).
Fionnuala Earley, Nationwide's Chief Economist, makes the point that the latest fall in house prices follows from the steep decline in house purchase transactions over the last half year. As a result of falling demand from first-time buyers, higher mortgage rates and tighter lending criteria, the number of mortgages approved for house purchases has fallen to record lows. The fall in transactions has pushed up the stock of unsold property on the market and improved the bargaining power of buyers, thus pushing down on prices.
Earley adds that although retail spending has so far been remarkably resilient as the housing market has faltered, lower house prices are likely to weigh down on the consumer over time. Indeed, in recent years, rising house prices appear to have boosted overall consumer sentiment and made housing equity available for consumer spending.
With house prices no longer rising, consumers are likely to become more cautious in their spending habits, contributing to a weakening of the overall economy. As the economy slows, inflationary pressures should moderate over time and allow the Bank of England to make additional interest rate cuts. However, the risk that the current strength of oil and food prices could feed into wages means that the MPC will probably prefer to cut rates at a more gradual pace than homeowners might prefer, adds Earley.
In addition to April's rate cut, the Bank of England announced measures to restore liquidity to the wholesale financial markets by offering an exchange of mortgage backed securities for government bonds. Earley argues that although the scheme appears well thought out and should help to stabilise the markets which have seen significant volatility in recent weeks, the scheme is unlikely to mean that house prices and mortgage lending will return to levels seen at this time last year.
In fact, weakening housing market sentiment and demand, unrelated to the financial market turmoil, will mean that we should expect slower market conditions. However, the Bank's measures should help to restore a more orderly transition and ultimately bring about a more stable market.
30 April 2008 © Moneyextra.com
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