Nationwide: U.K. house prices down 17.6% in year to Februay

The Nationwide has released its latest house price survey, showing a very large 1.8% fall in British house prices between January and February 2009.  This brings the yearly decline to a record 17.6%.  

Yet, incongruously, the Nationwide revealed this information on its website under the heading “improving affordability helps new and existing buyers.”  If this does not smack of cheerleading, I don’t know what does.

Fionnuala Earley, the Nationwide’s Chief Economist, was on Bloomberg Television this morning talking up the figures in her characteristically optimistic way.  Below is what she said on the Nationwide’s website.  I have highlighted the bits I find incongruously optimistic given the data.

“The price of a typical house fell by 1.8% in February, bringing the annual rate of change to -17.6% and the price of a typical house down to £147,746, from £179,358 this time last year. Sharp cuts in interest rates have helped affordability, but have not yet affected housing market confidence sufficiently to boost the levels of new transaction activity or slow the pace of house price falls. Early signs of increased interest in housing, as reported by the pick up in new buyer enquiries, have yet to filter into sales, but do suggest that falling prices and interest rates are raising curiosity now, which could flow through quickly once confidence returns.

“The February Inflation Report also implies that the MPC has not finished cutting interest rates yet. First, the Bank’s economic forecast factoring in a 25bp cut, left inflation significantly below its target two years ahead and GDP contracting sharply. Second, Mervyn King clearly stated that “further easing
may well be required” when asked how much further rates could fall – a sentiment subsequently echoed by other MPC members. Further cuts in rates will be welcome in the housing market, but the economic conditions that require them will mean that there is unlikely to be a swift turnaround in the housing market in 2009.

Falling mortgage costs may be helping retail sales
“Expenditure on housing, including rents, council tax, mortgages, maintenance and insurance, is one of the major components of household expenditure. The latest available data shows that it accounted for about one fifth of total household weekly expenditure in 2007. Amongst mortgage holders alone, the average weekly spend on mortgages was £138.80 per week, about 14% of the
total household weekly spend. Given its share of the household budget, changes in housing costs can have a real impact on the overall disposable income of the household. In the current climate, falling interest rates have reduced the mortgage costs of existing variable rate borrowers by about a third. This provides substantial relief for borrowers who may otherwise have struggled with their payments and provides additional disposable funds for those who would not. The change in mortgage costs may be one of the factors behind the resilience of retail sales amid the deteriorating economic

Let’s be honest here. Fionnuala Earley works for a building society. Therefore, her view is bound to have a pro-housing slant. Apparently, she is taking the view that house price declines will diminish in severity due to mortgage cost relief as the Bank of England lowers interest rates. That may well be the case. However, my more objective view is that UK house prices are still considerably higher than most metrics of fair value like price to income would suggest is reasonable. Witness the graphs from last month’s Nationwide survey which I highlighted in my January post “Nationwide: U.K. house prices down 16.6%.” There is still a considerable way to go before house prices in Britain hit bottom.

Improving affordability helps new and existing buyers – Press Release, Nationwide

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