The financial turmoil experienced by the markets poses a risk to the UK house market, however it’s unlikely to hit in the short term, Nationwide has said.

Unveiling it’s monthly house price index, Nationwide said that they still expect house price growth in 2007 to come in close to the middle of their forecast range of between 5% and 8%.

The average house price in August came in at £183,898, a monthly change of 0.6%.

Fionnuala Earley, Nationwide’s Chief Economist, said: “The rate of house price growth lifted a little during August, but the annual rate continues to moderate. Prices increased by 0.6% during the month, but the annual rate fell to 9.6% down from 9.9% in July. A typical UK property cost an average of £183,898 in August, £16,177 more than one year ago.”

Main Points
- House prices are unlikely to be significantly hit by market turmoil in the short term
- Dependence of UK economy on financial services poses a longer term risk
- Unexpectedly low inflation and financial market unrest has reduced the risk of a Bank Rate rise to 6%

However, the financial ups and downs of late could be factored in later. Nationwide said: “Whether the fall out from the US sub-prime crisis will have a more severe impact on the housing market longer term will depend on how long it takes for market jitters to settle.

A prolonged financial market downturn would be uncomfortable for the overall economy given the importance of this sector to economic growth over several years. Such a downturn would not only affect investment bankers, but would also have negative knock-on effects for legal, accountancy and other professional services that have benefited from the structured credit boom. On top of this, jobs in restaurants, cafes and other services catering for city workers would also be affected.

The impact on London property prices can only be negative compared to the current situation, particularly at the top end, but employment generated from Olympic and other infrastructure investment along with supply issues will remain positive factors for the mainstream market.”

But, in the short term there is some good news, with the building society saying that it expects interest rates to remain at 5.75%. Fionnuala Earley, Nationwide’s Chief Economist, said:”The turmoil in credit markets strengthens the case of the doves on the Committee as the MPC will be reluctant to do anything to add uncertainty while the markets remain volatile.

The Bank of England’s reluctance to intervene in the markets in the same way as the Fed and the ECB suggests that at the moment it is fairly sanguine about the lasting effects of the credit crunch. But the longer the squeeze continues, the more likely it is to have a dampening effect on the wider economy and hence the outlook for house price growth next year.”