House prices in the UK rose at their fastest rate in four months during October, bucking the slowdown that has been seen in the market, mortgage lender Nationwide has said.

House prices rose by 1.1% in October from the previous month, taking the average house price to £186,044, it said.

Despite the news of an increase, Nationwide did warn again those who may interpret October’s numbers as a sign that house prices are immune to deteriorating affordability and tightening credit conditions. Such conclusions would be “misguided” it said. Most leading indicators of housing market activity are continuing to weaken, Nationwide added.

Nationwide’s Chief Economist Fionnuala Earley said that: “Surveyors are reporting the weakest levels of new buyer inquiries in many years and mortgage approvals are falling from recent highs amid weaker demand and tighter lending criteria for riskier borrowers. Slowing demand, however, will not have an immediate impact on prices if homeowners are in no rush to sell.

New instructions to sell have in fact been falling since May, when there had been a temporary surge of property onto the market. Different factors could be driving the low level of instructions, including a reluctance to trade up amid current uncertainties and the fact that low unemployment is limiting the number of forced sales. The overall result is that the stock of unsold homes is still relatively low, and this is providing some residual support to prices. The underlying dynamics of the market, however, are clearly not as strong as this time last year.”

Main Points
- House prices rose strongly in October, but underlying market activity is clearly slowing
- Although demand is weakening, existing homeowners appear in no rush to sell
- New buy-to-let landlords will need a long investment horizon to realise good returns
- Average house price - £186,044

New buy-to-let investors may need more patience
For those who have recently entered the buy to let market, Nationwide has one word for you - patience. Landlords who entered the buy-to-let sector near the start of the decade have made enormous returns. However, strong house price growth relative to rents has pushed net rental yields well below the current cost of a mortgage.

Nationwide said this implies that without very strong capital gains, a new entrant into the market would make negative total returns in the short term until rents caught up sufficiently to cover operating and mortgage expenses.

There is now evidence that after several years of weakness, private sector rents are growing more robustly. Even so, rents would have to rise very strongly relative to house prices to make short-term buy-to-let investments profitable at current interest rates.

“That being said, investors with long horizons can still make satisfactory returns if long-term historical trends for house prices and rents hold up. The government’s latest projections show that the 15-34 year old population will be increasing until the middle of the next decade, and this should be supportive of both tenant demand and rents. Even with only modest house price inflation, these conditions would produce relatively healthy returns over a 10-15 year horizon.”

Concluding, Ms Earley said: “House prices recorded a surprisingly strong increase of 1.1% in October, tying it with June for the highest month-on-month growth rate so far in 2007. The average price of a typical UK property was £186,044 in October, £16,421 more than the same month last year.

The annual rate of price growth picked up from 9.0% in September to 9.7%, but this is still down from a peak of 11.1% in June and was partly driven by base effects. The rise in the annual rate temporarily breaks the slowing in price growth we have seen since June, but is unlikely to mark the start of a new upward trend.

November and December saw particularly robust gains in 2006, and unless prices perform very strongly for the rest of this year, the annual rate of price growth will resume a downward path. The 3-month on 3-month rate of price growth - which helps smooth monthly volatility - edged up only modestly from 1.7% to 1.9%, which is still below the average of 2.2% seen so far in 2007.”