House prices rose by 0.3% in January, their slowest pace for 8 months, the Nationwide has said.

Nationwide the slowdown in the rate of growth is an early indicator of the house market starting to cool. Additionally, estate agents reported some easing of demand in December and January. The number of newly agreed sales is rising more slowly and the length of time properties are on the market seems to be getting longer.

Nationwide also said that new buyer enquiries recorded their first fall in 19 months. “While the correlation with mortgage approvals is not perfect, it suggests that the 129,000 house purchase approvals recorded in November may have been the peak. It is likely that we will now begin to see a weakening in demand as a result of stretched affordability and rising interest rates.

Of course, prices are determined by supply as well as demand. For now, supply, as measured by new instructions for sale of properties with estate agents, is actually falling more quickly than demand and this puts upward pressure on house prices. As a result, estate agents are still reporting firm house price gains and an expectation of more to come. However, eventually the slower demand will ease the rate of house price growth to more sustainable levels.”

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Main Points
- Prices increase by just 0.3% in January, the lowest monthly rise for eight months
- House prices in 2007 expected to remain firm in spite of rate rises
- A further 0.25% rise in rates cannot be ruled out

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Factoring in interest rates
The recent rise in interest rates is also starting to hit the market with higher rates likely to reduce new demand to some extent. Nationwide said that first-time buyers will now find it more difficult to enter the market as mortgage payments take up a greater proportion of income.”During 2006 aspiring first-time time buyers on average incomes have seen initial mortgage payments as a percentage of take-home pay rise from 40% to 44%. This makes it more likely that at least some of this group will choose to rent.

For investors, low rental yields were already a problem and higher interest rates will have raised investors’ reliance on capital gains to achieve good returns. At the same time, higher interest rates and signs of market cooling are likely to moderate their expectations of future capital gains and thereby reduce demand.

The main risk is that sentiment and expectations change abruptly in response to the rate rises leading to a severe loss of confidence. However, the more likely outcome is that the market will remain fairly stable but slow a bit more quickly than we initially expected. This would bring our expectation of house price growth in 2007 into the lower end of our 5% to 8% forecast.”

Commenting on the figures Fionnuala Earley, Nationwide’s Chief Economist, concluded: “2007 started off with a bang as the Bank of England raised interest rates for the third time in six months. Only time will tell how much the surprise decision will affect sentiment in the housing market, but even before January’s rate rise there were already some very early signs of cooling.

House prices increased by just 0.3% in January, the smallest monthly rise since May last year, which pulled the annual rate of house price growth back into single digits. Prices increased at an annual rate of 9.3% in January, down from 10.5% last month. The price of a typical house now stands at £173,225.”