Nationwide released data from its August 2009 house price index showing that house prices rose 1.6% from the previous month. This is the fourth consecutive month in which house prices have risen in the UK, bringing the year-on-year change to –2.7%.
Martin Gahbauer, Nationwide’s Chief Economist, said low interest rates are behind the recent rise (emphasis added):
“The exceptionally low level of interest rates offers some explanation for why house prices have not repeated the very sharp falls of 2008. There are two main channels through which the low level of interest rates has impacted the housing market. First, mortgage payments for existing homeowners – especially those with tracker or standard variable rate loans – have been reduced substantially. Before the MPC began cutting rates, the average interest and principal payment per mortgage holder represented about 38% of the average post-tax labour income. Following the steep cuts in base rate, this has fallen to just 28% of post-tax income, despite historically high levels of outstanding mortgage debt. The fall in debt servicing costs has meant that fewer homeowners are under immediate financial pressure to sell than might have been expected in a recessionary economic background with rising unemployment. Partly as a result, fewer second-hand properties have come onto the market than is normally the case in recessions, which has contributed to moving the balance of supply and demand more in favour of sellers over the course of 2009.
In addition to limiting the supply of second-hand homes, lower interest rates have also had an impact on the demand side. Even though house prices remain high relative to earnings, the fall in interest rates has improved the affordability of mortgages for those looking to buy a home. This helps to explain the strong rise in new buyer enquiries reported by estate agents for most of 2009. Although not all of these enquiries are turning into sales, house purchase transactions have continued to slowly increase from the record lows reached in late 2008.”
Obviously, this leaves open to question what will happen when interest rates rise. Certainly, by that time, the economy will be on sounder footing and the financial pressure to sell will be less.
The rise in residential property prices in the UK does show the market has housing stabilised. Definitive confirmation would come in the winter when the market is less buoyant. For now, it seems the worst is over.
House price bounce extends into August – Nationwide