House prices in August fell by 0.2pc according to Nationwides August House price survey.

House price growth is now at it’s slowest level for 9 years with the average cost of a home in the UK now £157,310, down from £153,743 in August 2004.

Nationwide believes that this slowdown in growth is a sign that the market is heading for a soft landing.

Fionnuala Earley, Nationwide’s Group Economist, said: “House prices increased in eight out of the last twelve months, but the general path of house price inflation continues to be soft. Prices fell by 0.2% in August, reversing July’s increase and continuing the gentle slowdown seen since the start of the year. Prices in the three months to August increased by 0.3% and the annual rate of house price inflation is now 2.3%, compared to 2.6% last month and 18.9% at this time last year.”

With consumers expecting the slowdown, sellers are now adjusting their expectations on the value of the property. Coupled with the recent interest rate cut by the Bank of England, Nationwide say that the market is turning in favours of buyers, with an increase in enquiries from prospective buyers and increased optimism about sales from estate agents.

However, affordability of a home is still an issue. Commenting on this, Fionnuala Earley said: “While market activity seems to have stabilised, this does not signal the start of a further period of sustained growth in house prices. Even though wage inflation is almost twice the rate of house price inflation, affordability is still an issue, particularly for first-time buyers, and it will take some time for the balance to be redressed.”

On the issues facing first time buyers, Ms Earley added: “The first-time buyer house price to earnings ratio is significantly higher now than at the last peak. Even with lower mortgage rates, mortgage repayments absorb about one third of take home pay and the average first time buyer now needs to raise a deposit of almost £17,000 compared to around £11,000 in 2003 ? more than a 50% increase in two years.

In terms of a proportion of gross annual income, a first time buyer’s deposit now accounts for 62% of gross annual pay compared to 20% sixteen years ago. However, this reflects that first-time buyers now borrow a smaller proportion of the purchase price than they did in 1989.

This shows how ability to pay criteria, such as income multiples, constrain the amount that they can borrow. Because of these higher deposits, it would now take a first time buyer almost three and a half years to save a deposit compared to just over one year in 1989″

So the market looks set to continue its cooling – “In the housing market the current background suggests that the market will continue to cool in a contained fashion, but it will be some time before we can expect prices and activity to return to the growth rates seen in the last two years.

Lower interest rates are a reflection of lower inflation and while lower rates mean that borrowers can afford to service higher levels of debt, lower inflation means that it takes longer for the real value of that debt to erode. We can therefore expect a sustained period of unexciting movements in house prices before consumers’ financial balance sheets are restored to more comfortable levels.”

Links:
Nationwide