Nationwide has said that house prices are refusing to cool down with prices jumping by 1.4% in November causing the annual rate of growth to 9.6%, up from 8.0% last month.

It is the highest rate of annual house price growth since February 2005 and means that house prices are 15,046 pounds higher than twelve months ago, the equivalent of a 41 pound rise per day.

Nationwide added that the price of a typical house is now £172,185.

The second half of 2006 has seen average monthly increases of 1.1%, almost double the 0.6% in the first half of the year and much higher than the average 0.2% per month in 2005. Looking forward, current housing market indicators are firm and do nothing to dent the prospect of further rises in house prices in the very short term.

Approvals and Supply
House purchase approvals increased again in October to reach their highest level since December 2003 when prices were increasing at an annual rate of 15.6%. Some cooling seemed to be in prospect when the growth of buyer enquiries fell quite sharply in September, but this pause in demand was short-lived. At the same time, stocks of properties for sale are at a two-year low leaving buyers chasing relatively few properties. With instructions still falling, there is no immediate improvement in supply conditions in sight.

Prospects
Looking at the economy, Nationwide said that “while a rate rise cannot be ruled out, it seems less likely than it did a few weeks ago and we maintain our view that interest rates are likely to have peaked at 5%.”

“Looking forward the prospects for the rate of continued growth will depend partly on expectations. As last week’s research suggested, if people believe that strong increases in house prices will be repeated, their incentive to buy is increased. Buyers will be willing to face large costs now with the expectation that these will be outweighed by future capital gains. Clearly the size of the expectation has a bearing on how long people will continue to stretch themselves. For now, Nationwide data on house price expectations show a rise in house price expectations over the past year, but the key question is whether expectations will moderate or become negative in the near future and, if so, how quickly this will impact on the market.

All down to confidence
If confidence in the market evaporates, the expected return on buying could fall sharply as there would be less expected capital gain. This could rapidly affect the buy-to-let sector which has been rising in importance in the UK market.

ARLA3 currently builds in a fairly strong expected annual house price growth assumption of 8.6% in its calculations resulting in overall returns on a 5 year geared investment of around 22%. If expected gains were to fall to around the level of earnings growth, with everything else staying the same, the total returns halve. This presents quite a different investment proposition.

While it seems clear that expectations are an important influence on house price growth the tricky question is how homebuyers form these expectations. With interest rates likely to have peaked at 5% and the economy growing at a stable rate there is no obvious trigger that would lead to a sudden loss of confidence.

The labour market in particular is stable. With growing employment and steady growth of earnings, forced sales will be kept to a minimum. And with the UK’s slow housing supply response, demand in the market is likely to remain fairly firm for the time being.”