House prices continued to fall during August, with Nationwide reporting that the total drop in house prices over the past year has been by 10.5% - the first annual double digit fall since 1990.

When compared to July this year, house prices fell by 1.9% nationally, leaving the average price tag of a home at £164,654.

And the gloom is likely to continue with housebuilders expecting a subdued market ahead.

Fionnuala Earley, Nationwide’s Chief Economist, said: “The price of a typical house fell by 1.9% in August, bringing the annual fall into double digits for the first time since the fourth quarter of 1990. The price of a typical house fell by 10.5% over the last twelve months to £164,654. While the pace of monthly falls picked up during the month, the less volatile three month on three month measure, eased very slightly in August to 4.5% from 4.6% in July.

Recent activity levels in the housing market have been very subdued. House builders in particular have been reporting significant reductions in site visits and reservations of new properties since this time last year, in spite of a big increase in the use of sales incentives.

Reservations of new property began to feel the squeeze before any slowdown was recorded in the official number of house purchase approvals, but the two series have moved closely over recent months. House builders report that a lack of confidence in the market is the biggest reason behind the drop off in demand, although changes in lending criteria are also reported as an issue.

“Estate agents’ data across all property types is a little more optimistic and suggests that there may be some glimmers of interest returning to the market. Agents report an improvement in new buyer enquiries, perhaps stimulated by the recent falls in prices and the opportunity to negotiate a good deal. However, the reported numbers of sales have not been encouraging. The ratio of sales to stocks has been a good predictor of movement in house prices. Current movements suggest that the increased supply of properties on agents’ books will continue to act as a dampener to house price growth
in the short term.”

More opt for fixed rates
Looking at the mortgage market, Ms Earley said: “that consumers’ preferences have changed since this time last year. 44% of borrowers say that they are more likely to look for a fixed rate mortgage. Furthermore 43% say that they are now more likely to consider a longer term fixed rate loan than at
this time last year.

Tracker loans have been cheaper than fixed rate loans since October 2007, but in spite of that the proportion of borrowers choosing a fixed rate loan has been increasing. This is unusual for UK borrowers who, as the Miles Review illustrated, attach enormous weight to the level of initial monthly repayments, rather than considering the potential movements in prices over a longer period.

This change in behaviour could be an indication that borrowers are keen to be sure of their outgoings in
uncertain times and wish to protect themselves, even though the choice may be more expensive in the short run.

In addition, among the fixed rate loans available, borrowers seem to be keeping true to their word and
opting for longer term fixed rate loans. Two and three year fixed rates have historically been more
popular with house buyers and remortgagers respectively, but in both cases five and ten year fixed rate loans have become more popular this year. At the start of the year five and ten year fixed rate loans accounted for only 21% of house purchase and 19% of remortgage fixed rate borrowing. In June the respective proportions were 39% and 47%.

As the Miles Review states, there are benefits to borrowers from taking out longer term fixed rate loans as they insulate them from the impact of unexpected changes in interest rates. This is particularly at times when the stock of debt is large relative to income and when the impact of changes in interest rates on affordability is high. However, it seems that price remains an important feature. The cost of all fixed rate loans has increased since the start of the year, but two year fixed rate loans became the most expensive. It is not clear whether borrowers are opting for longer fixed rate loans for certainty over a longer period, but it seems likely that price is playing a part in the choice of fixed rate term. “