Economic tracker - January

23 January 2012 | By Robert Gardner, Chief Economist, Nationwide, Martyn Dyson, head of mortgages, Nationwide

Robert Gardner, Chief Economist, Nationwide

House price picture surprisingly steady

Nationwide’s latest house price index shows that while prices across the UK fell 0.2% in December they increased 1% in 2011 as a whole.

The rise could hardly be described as a strong performance but, against a backdrop of weak economic growth and a deteriorating labour market, UK house prices proved surprisingly resilient.

While both demand and supply of houses remain weak, they are relatively well matched, providing little impetus for prices to move strongly in either direction. High rates of unemployment, falling real wages and the uncertain economic outlook kept many potential buyers on the sidelines. The lack of building activity in recent years and the low level of forced sales thanks to low interest rates, prevented a glut on the market.

Regionally, there has been less variation than usual in house price movements in recent quarters. In 10 of the 13 UK regions the annual price change was clustered in a narrow band of between +2% and -2%.

This trend is also evident in the two measures of regional house price variation - the range, which is the highest rate of annual house price inflation recorded in a region during the quarter compared with the weakest rate, and the standard deviation, which is a measure of how far price movements in all the regions deviate from the average.

While average house prices in most regions remained relatively stable during 2011, two regions - London and Northern Ireland - stood out although for different reasons.

The London market remained buoyant in 2011, with prices rising 5.5% during the course of the year. This was the second time in three years that London topped the regional house price performance table. Indeed, house prices in the capital are now just 1.6% below their all-time highs, while in the UK as a whole prices are still 10% below their peak.

At the other end of the spectrum is Northern Ireland where house prices fell 8.7% in 2011. Average prices there ended the year at half their all-time high in late 2007. Of the 13 UK regions only four - Scotland, the North, the North-West and Northern Ireland - saw negative growth.

With no end in sight for the eurozone crisis, challenging labour market conditions and elevated inflation, 2012 isn’t shaping up to be much better than 2011 for either UK house prices or the wider economy.

Martyn Dyson, Head of Mortgages, Nationwide

Grim market outlook has sprinkle of hope

The latest Credit Conditions Survey by the Bank of England painted a downbeat outlook for the mortgage market in 2012. The survey, which covers lenders’ views on the market, showed they expect to tighten credit scoring criteria for granting new secured loans to households.

During Q1 2012, lenders also expect a fall in mortgage approvals due to declining levels of household disposable income.

Conditions are likely to remain tough during the next 12 months, but the mortgage market won’t be all doom and gloom. While the Council of Mortgage Lenders has reduced its predictions for the size of the mortgage market in 2012, it still expects lenders to broadly complete the same volume of business as last year.

Changes to credit score criteria and predictions of falls in gross mortgage lending are only a part of the picture. The mortgage market won’t be unmitigated misery in 2012, particularly for first-time buyers.

At the peak of the credit crisis the number of mortgages available on the market plummeted, with low-deposit mortgages all but disappearing. Today most players in the mortgage market are offering deals at 90% LTV and the increased competition has led to rates tumbling.

Figures from Moneyfacts.co.uk show the average two-year fixed rate at 90% LTV has fallen by 0.97% from 6.48% in January 2010 to 5.51% today. During the same period the average rate at 75% LTV has only fallen 0.31%, from 4.37% to 4.06%.

As this year progresses it is likely we will see more deals at 90% LTV becoming available. The increased volume and competitiveness of 90% LTV mortgages is particularly good news for first-time buyers who in recent years have had limited options. Lenders are once again offering products intended to help first-time buyers to get on to the first rung of the property ladder.

Although the Stamp Duty incentive for first-time buyers ends in March, there will be assistance for borrowers in the shape of the new-build mortgage indemnity guarantee scheme.

The next 12 months may prove challenging, but there will continue to be opportunities for brokers due to lenders’ support and initiatives to help get the mortgage market moving.