House prices 10% below peak values
House prices are now less than 10% below their 2007 peak, although the market is still suffering from a short supply of properties and low transaction levels.
Nationwide’s latest house price survey reveals that the price of a typical UK property rose by 0.5% month-on-month in May.
This takes the cost of the average home to £169,162 – up more than £15,000 on the same month in 2009.
However, the pace of growth slowed from 1.1% in April with annual house price inflation dropping from 10.5% in April to 9.8% in May.
Nationwide now believes prices are set to slowly creep up, driven by a lack of supply.
Chief economist Martin Gahbauer says: "Housing market conditions remain characterised by thin transaction volumes and a relative scarcity of properties for sale, despite a slow return of more sellers in recent months.
"The current supply-demand balance on the market is still consistent, with relatively stable to modestly upward trending prices."
Ed Stansfield, property economist at Capital Economics says prices are likely to fall back later in the year.
“For now, house prices continue to rise, but easing supply shortages, overvaluation and, of course, the weak economic backdrop, all argue for renewed falls later this year.
“The looming public sector spending squeeze is likely to prolong the downturn in the labour market and keep household incomes under downwards pressure, ensuring that the economic recovery struggles to gain momentum.
Stansfield added that yesterday’s weak net mortgage lending data also pointing to a renewed mood of caution among lenders.
Furthermore, he says potential changes to Capital Gains Tax could destabilise the market by triggering a wave of sales among investors and second home owners.
Gahbauer adds: “The incentive to try to beat the higher tax rate is most pressing for those who have owned their properties for a relatively long period of time and therefore have relatively large unrealised gains.
“Conversely, those who bought their second homes or investment property within the last five years have little incentive to sell early in order to beat the tax change. House prices have only risen back to their mid-2006 level and the first £10,100 of capital gains is currently tax free.”
However, the timing of any changes will prove crucial; if these are put into place immediately then many homeowners will have missed the boat.
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).
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.