House price inflation ‘bounced back’ in June with prices rising by 1.1%, according to the latest survey from the Nationwide building society.

Nationwide said that the better than expected increase lifted the annual rate of growth to 11.1% from 10.3% in May.

House prices were rising at more than twice as fast as last year, bringing the average house price now £184,070.

Commenting on the figures Fionnuala Earley, Nationwide’s Chief Economist, said: “While June’s heavy rain dampened the first days of Wimbledon, it did little to check the vigour of the housing market as house price inflation bounced back during the month. House prices increased by a stronger than expected 1.1% in June - the fastest monthly increase in 2007.

The pick up during the month brings the annual rate of house price inflation to 11.1%, its highest level since January 2005 and more than twice as fast as the pace of growth at this time last year. The price of a typical house is now £184,070, more than £18,000 higher than this time last year, which is the equivalent of a rise of more than £50 per day.”

Main Points
- House price growth bounced back in June, increasing by 1.1% during the month
- Prices increasing more than twice as fast as last year, at the equivalent of £50 a day
- Rate of growth will slow in second half of year; we stick with our forecast of 5-8% growth in 2007
- Gordon Brown’s increased focus on housing is welcome, but the implications of any changes to buy-to-let taxation need to be carefully thought out
- Average cost of a home in the UK: £184,070

Rates
However, the growth in the house market will lead to increased pressure on the Bank of England to raise interest rates at it’s next meeting. Nationwide said that on the back of this, it expects interest rates to rise to 6.0%.

Softening of the market
Despite the growth figures for June, Nationwide still expects a softening of the market. Fionnuala Earley said: “House purchase approvals fell back to 107,000 in April, their lowest level for a year, and while there may be a small rebound in May other data at the very start of the chain suggests that the trend is down. Estate agents are continuing to show a fall in the number of new buyer enquiries and house builders are also registering falls in the numbers of site visitors.

Furthermore, in the rental market,yields for new entrants to the buy-to-let market are being squeezed significantly. This will slow the growth of this sector and also take some pressure off house price growth. We therefore stick with our forecast of 5%-8% growth in UK house prices in 2007. Of course across the UK there will be significant differences in house price growth. London, in particular, will lead the English regions. Demand in the capital reflects both strong local economic conditions and the preferences of wealthy overseas investors.”

And what of the new PM
“There has been much fuss recently about the impact of the buy-to-let market on affordability for first-time buyers and in particular the tax treatment of buy-to-let borrowers against owner-occupier borrowers. Buy-to-let landlords can offset their mortgage interest payments and maintenance costs against their rental income meaning that they only pay tax on any residual rental income after these have costs have been taken care of.

Some estimates have put the tax saving to landlords as high as £2bn. While such reliefs are commonplace in other areas of business, they come under more scrutiny in the housing market where the ability to make large capital gains, partly due to the lack of supply of property, is a controversial issue.

If Gordon Brown were to do something radical in this area, any policy he chose would have to be carefully thought out and introduced in a measured fashion. Given the rapid growth in the buy-to-let sector in recent years a dramatic change to the financials for landlords, particularly in a period of rising interest rates, could lead to some uncomfortable consequences.

A large withdrawal from the sector, either as a result of reduced ability to pay, or because changes made yields much less favourable compared with other investments, could rapidly change the dynamic of the housing market. An ill-thought out measure which flooded the market with property could do more to destabilise the market for all borrowers rather than just make it a more affordable prospect for new entrants.”