Equities outperform housing for ‘first time this century’
– House prices increased by 0.5% in December
-Prices in the UK increased by 3% in 2005, compared to 12.7% in 2004
– Prices in 2006 are expected to increase by 0-3%
Commenting on the figures Fionnuala Earley, Nationwide’s Group Economist, said: “After a 0.5% increase in prices in December, house prices in 2005 were 3% higher than at the end of 2004, in line with our forecast this time last year. House price growth strengthened slightly in December, up from a 0.3% increase in the previous month. During 2005, the price of the average house rose by just over £4,500, equivalent to £13 per day compared with an average rise of £47 per day in 2004. The second half of this year saw virtually no change in prices. The average house price in the UK is now £157,250, almost exactly the same level as in May.
Equities outperformed house prices for the first time since 1999
“This is the first time in five years that annual price inflation has been in single digits at the end of the year. 2005 was also the first year this century that growth in the equity market has outperformed the housing market. The FTSE 100 grew by 16% in 2005, compared to housing market growth of 3%. But the FTSE still remains 10% below its 1999 level, whereas house prices are more than twice as high as than at the end of 1999.
Prices cooled dramatically in 2005 but have picked up since the autumn
“The rate of annual house price growth fell by almost ten percentage points during 2005, from 12.7% in December last year to 3% now. The rate of deceleration in the annual rate led many to predict that this was the start of a severe crash in the market. But looking at changes over three months shows the more sober path of prices during the year. It also shows clearly the pick up in prices since the autumn. In fact, prices in the last three months of 2005 rose by 1.3%, more than the 0.8% in the same period last year. But the rate of growth is still modest by the standards of the last five years, when three monthly growth rates of more than twice this rate were normal.
Lower interest rates are on the horizon …
“While there is uncertainty about the economy at present we still expect that the next move in interest rates will be down and that this is likely early in 2006. Market sentiment has now moved away from a rate hike. Reaction to the MPC minutes, which revealed an unexpected dissent in the voting at the December meeting, led to a further softening in market expectations and the futures market is now pricing in a cut in base rates by March.
…but looking forward we continue to expect the housing market to remain broadly stable
A cut in interest rates will clearly be favourable for the housing market, but while the market responded quite swiftly to the rate cut in August, we do not expect a cut to cause annual house price inflation to accelerate back up to levels seen in early 2005. Broadly favourable economic conditions, combined with the ongoing imbalance between the demand for housing and the rate of new build mean that there is a supportive environment for prices. But affordability, particularly for first time buyers, remains a significant obstacle. Nationwide expects the market to remain fairly stable in the next year and predicts that house prices in the UK will increase between 0-3% in 2006. This is based on our view that the economic conditions ahead will remain fairly benign and that in particular there will be no significant deterioration in the labour market.