Nationwide reveals Spring bounce to housing market

Amanda Jarvis

March 30, 2006

-House prices increased by 1.1% in March
– After a brief pause in February, prices back on strong upward trend
– Deteriorating affordability and rising utility bills will stretch income and act as a brake
– Stamp Duty changes will only help 2% of buyers

House price growth bounced back strongly in March after a brief pause in February. Prices rose by 1.1% in the month. The annual rate of house price inflation is now 5.3%, bringing the price of a typical house up to £162,083. This is more than £8,000 higher than at this time last year — the equivalent of a price rise of £22 per day.

Activity remains remarkably strong
The housing market seems to have shrugged off bad news about job losses and downside risks to economic growth. The strength of the housing market has become one of the major factors in the MPC’s reluctance to reduce interest rates. The pick up in prices in March continues the upward trend we have seen since the autumn, which has been supported by a solid return of buyers. Activity levels fell back to 115,000 in February but remain remarkably strong. There were 115,000 house purchase approvals in February, well above the 10 year monthly average of 100,000. Activity this strong has not been seen since the late Spring/early summer of 2004 when annual house price growth was almost 20%.

but there may be signs of softening
Estate agent and house builders’ survey data suggests that there is still growing interest in the market with rising levels of buyer enquiries, site visits and reservations. But, there are perhaps signs of some softening in other parts of the surveys, consistent with the latest weakening in house purchase approvals. While the balance of estate agents expecting upward price movements in the next three months is positive and still growing, there is a less optimistic view of future sales activity. There is also some softening in the rate of growth of asking prices which would suggest that prices are beginning to be constrained by affordability.

Some volatility ahead, but affordability will constrain further acceleration
With this background we do not expect that prices can continue to accelerate. While the macro economy remains fairly benign, with a reasonably robust labour market, there are increasing calls on income on the horizon which will constrain demand. Utility and council tax bills are rising and on top of this, affordability continues to be squeezed as house prices rise further. First-time buyers now spend about 40% of their take home pay on mortgage payments. Even in a market with historically low interest rates and competition beating borrowing rates down further, there is a limit to the proportion of income that borrowers will feel comfortable spending on their housing. But demand from other sectors of the market could provide some support in the coming months. Investors face very low yields on alternative long term investments, this and uncertainty about pensions, may boost interest in the buy to let sector. As there remains some optimism on rental incomes, this demand could continue to support prices for a little while longer.

The Budget brought little for first-time buyers
Against expectations the Chancellor raised the level of the lowest stamp duty threshold limit by £5,000 from the £120,000 announced last year. But this 4% increase is below the annual rate of growth of house prices over the last year and, while a move in the right direction, remains far behind its value in real terms compared to when it was first introduced in 1993. Had the limit risen in line with general house price inflation it would have now been 220% higher at £192,000. But if it had increased in line with the rate of growth of typical first-time buyer properties, it would be 235% higher at over £200,000. Given the average house price is well above even the new threshold, only about 2% of buyers will benefit from the revision – only those buying property worth between £120,001 and £125,000.

The slab structure of the tax means that someone buying a property worth £125,001 will face a bill of £1,250.01, but someone buying for £1 less faces no bill at all. Because of this high marginal tax rate we believe that the distribution of transactions within the price bands is distorted leading to a higher proportion of transactions at or just below the threshold, and a lower proportion just above it. Taking this distortion into account and based on transactions and prices over the last year, we estimate that only about 30,000 homeowners would benefit from the Budget change. And, with prices continuing to rise, the value of the increased threshold is already being eroded. The average value of a first-time buyer property in the UK is £131, 903 – already above the new threshold level. Furthermore, given the variation in house prices across the regions, far fewer first-time buyers in the South, where affordability is more stretched, will benefit from the change.

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