Regional affordability indices show the North and the North West to be most stretched and trading was up hardest for more than 10 years.
Alex Bannister, Nationwide's group economist, says: "House price growth remained subdued in September, with the price of an average property up just 0.2% on a seasonally adjusted basis.
“This followed a rise of 0.1% during August. The average property price is now 17.8% higher than a year ago at £153,727. Property price inflation over the last 3 months, on an annualised basis, slowed to 10.1% down from a peak of 28% in April 2004.
"Bank of England data confirmed that the level of housing market activity was subdued in August, with the number of house purchase mortgages approved (seasonally adjusted) falling to 96,000 from around 125,000 per month over the spring period. Activity is set to remain at lower levels over coming months as home purchasers continue to adopt a cautious approach.
“However, activity is still higher than during much of the 1990s and in our view remains consistent with further modest house price growth.
"The regional house price growth picture remains broadly unchanged from last quarter, with prices rising fastest in Wales (up 34% on a year ago), the North (30%) and the North-West (28%). Annual house price growth was once again lowest in London (11%) and the Outer Metropolitan area (10%). Over the last two years, average property prices have increased £40,000 in London compared with rises of more than £50,000 in the North, North West, Wales and Yorkshire & Humberside. At a more local level, the areas that have seen prices rise the fastest include Sedgefield, South Ayrshire, the Ribble Valley and Bolton. Prices have risen slowest in Newham, Crewe & Nantwich, Rushcliffe and Chichester.
"It is often commented that the London and the South East housing markets are the most stretched in the country. This view is based on the fact that the average price of a property is around 6.75 x the average level of earnings in London compared with, for example, 5.78 x in the North West. However, this is a little misleading since London has always been the least affordable region in the UK, with the house price to earnings ratio averaging 4.64 over the last 20 years compared with 3.45 in the North West.
"A more useful guide is to compare current property valuations with prior peaks - particularly that of the late 80s which heralded the onset of the last housing slump. In addition, there are a number of reasons why a higher level of house prices relative to earnings is now possible compared with the past including: supply shortages, higher levels of discretionary cash to be spent on housing, a desire to use increased wealth/income to consume more housing and an increased investment motive, perhaps as a substitute for private pensions.
“However, current low levels of interest rates do justify a higher valuation relative to earnings, so we have calculated new regional affordability indices (published in full in table 3, page 6) which take account of the level of interest rates.
"On this basis, affordability looks significantly better than at the peak of the last boom in most regions. However, it is clear that London and the South East look considerably more affordable relative to the eighties peak than the North, North West and Wales. In our view these three regions, where rapid price growth has been in evidence over the last few years, are the most stretched and, therefore, the most vulnerable to a significant slowdown.
"In percentage terms cheaper properties such as terraced have 'outperformed' more expensive properties over the last three years. For example, average terraced property price inflation in the West Midlands over this period has been 22% compared with inflation for detached properties of 16%. However, for existing homeowners looking to trade up what matters is the change in the price of their property compared with the change in price of the property they are hoping to buy. During the current upturn the price of detached properties – in absolute money terms – has risen faster than the prices of other property types. Consequently, trading up is now at its hardest for more than 10 years.
“Currently in the West Midlands, someone trading up from a semi-detached to a detached property has to find an extra £70,000. In mid-1999 they would have needed £40,000 to trade up.
"Our forecast for annual house price inflation in December 2004 remains at 15%. Prices have risen 12.5% so far this year and our forecast implies rises of 0.8% per month over the remaining three months of the year.
“If prices were to continue rising at the pace seen in the last two months, annual price inflation in December would be 13%. Going into 2005, we expect continued subdued price growth with the faster growing regions, such as the North and Wales seeing the sharpest slowdown in price growth. However, given the positive outlook for the economy and the jobs market in particular, we expect the market to tread water, involving subdued price growth, rather than experience a sustained widespread slump in prices."