House prices back to 2008 levels
House prices are now at the same level as September last year, after the fifth consecutive month of increasing values.
The latest Nationwide house price index shows a 0.9% rise in prices during September, following a 1.4% rise in August. The three-month rate of change – often considered to be the most accurate way of measuring price changes – also rose, from 3.3% in August to 3.8% the following month.
The average house price now stands at £161,816 – exactly the same value as September 2008.
“The further increase in house prices is very much consistent with improvements in a broad range of economic and financial indicators over the last few months, all of which suggest that the most intense phase of the recession and financial crisis has probably passed,” says Martin Gahbauer, chief economist at Nationwide.
However, concerns remain over how sustainable the ‘recovery’ really is.
With unemployment still high and mortgage lending restrictions largely unchanged, blossoming house price might well falter or even reverse in months ahead. In addition, the stamp duty exemption on properties up to £175,000 will be removed at the end of the current year – which could dampen demand for property, especially among first-time buyers.
Gahbauer also points out that sales of property remain slow: “One reason to remain cautious about the outlook for house prices is that turnover in the market is still well below normal levels.”
He estimates that it will take a further 18 months for housing turnover to reach pre-downturn levels. With a strong correlation between turnover and house price inflation, it is vital that sales pick up in order for prices to also return to 2007 levels.
Currently, house prices remain down 13.5% from the October 2007 peak.
Another concern is the trend of ‘accidental landlords’ – homeowners who, unable to sell, decide to rent out their homes instead. This trend has tapered off over recent months (partly because rental yields have dropped), which could have negative implications for the housing market.
“Much will depend on how quickly supply shifts from lettings to sales and what demand conditions look like when it does,” Gahbauer explains. “All else equal, one would expect an increase in property available for sale to put downward pressure on house prices.”
Unless demand can keep up with their increase in supply, house price rises could be stifled. “Rising unemployment and tight credit conditions suggest that demand may remain sluggish in the near term,” warns Gahbauer.
Housing experts also remain concerned. David Smith, a senior partner at property consultancy Carter Jonas, says: “We are in the eye of the storm, at present.
"Yes, house prices are rising, due to a combination of low supply and more positive news generally emerging from the economy, and yes we are almost certainly past the worst, but we have to expect more turbulence ahead, specifically as a result of rising unemployment and interest rates.”
Smith predicts that the housing market will become flooded with property as households struggle to cope with their mortgage repayments. “This will lead to downward pressure on prices and potentially reverse the recent trend, at least for a time.”
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).