House prices rise 1.7% in January

House prices rose 1.7% in January, taking the annual increase to 26.5%, the latest Nationwide house price index reveals. The average price for January stands at £117,905.

Nationwide expects “very stable and strong” growth to continue, keeping the annual inflation rate around 25% for the next couple of months.

However, it predicts that the annual rate of inflation will start declining significantly in the spring, and says a similar pattern is likely to be followed by house sales and lending.

The lender finds little evidence of a slowdown in mortgage lending. December house sales were up 7% on a year earlier, meaning that during 2002 nearly 1.6 million properties – one in 10 homes – changed hands. This is the highest level of transactions for 14 years.

Nationwide believes borrowers are more insulated from the effects of falling house prices than in the past.

The main reason for this is the trend towards buyers putting down larger deposits. In 1989 almost 300,000 first-time buyers put down a deposit of 5% or less. But Nationwide estimates that only 125,000 put down a deposit of 5% or less in 2002, meaning that fewer people lack a buffer against falling house prices.

Nationwide says that current levels of consumer debt are sustainable given record employment levels and low real mortgage rates. In contrast, it says the current growth rate of borrowing is unsustainable and will slow significantly over the next few years.

Alex Bannister, Nationwide&#39s group economist, says: “The key to whether debt levels are sustainable comes down to the strength of the labour market and affordability. Although much of the recent employment growth has been part-time and in the typically lower paid public sector it is difficult to say that the labour market is anything other than supportive. Unemployment is below 1 million and continues to decline with employment levels at record highs.

“The same is true of affordability. While there is a risk that some borrowers have over-stretched themselves the average payments of a first-time buyer are currently around 25% of gross earnings compared with 31% in the mid to late 1980s.”

Bannister identifies three key risks to the housing market – a sharp rise in interest rates, a significant increase in unemployment or a large fall in consumer confidence.