UK house prices rise in October

House prices recorded a surprisingly strong increase of 1.1% in October, tying it with June for the highest month-on-month growth rate so far in 2007, according to figures from the Nationwide Building Society.

The average price of a typical UK property was £186,044 in October, £16,421 more than the same month last year.

The annual rate of price growth picked up from 9.0% in September to 9.7%, but this is still down from a peak of 11.1% in June and was partly driven by base effects.

Commenting on the figures Fionnuala Earley, Nationwide's Chief Economist, said: “The rise in the annual rate temporarily breaks the slowing in price growth we have seen since June, but is unlikely to mark the start of a new upward trend. November and December saw particularly robust gains in 2006, and unless prices perform very strongly for the rest of this year, the annual rate of price growth will resume a downward path. The 3-month on 3-month rate of price growth – which helps smooth monthly volatility – edged up only modestly from 1.7% to 1.9%, which is still below the average of 2.2% seen so far in 2007.

Strength of house prices masks weakening of market activity

“While some may be tempted to interpret October’s numbers as a sign that house prices are immune to deteriorating affordability and tightening credit conditions, such a conclusion would be misguided. Most leading indicators of housing market activity are continuing to weaken. Surveyors are reporting the weakest levels of new buyer inquiries in many years and mortgage approvals are falling from recent highs amid weaker demand and tighter lending criteria for riskier borrowers. Slowing demand, however, will not have an immediate impact on prices if homeowners are in no rush to sell.

New instructions to sell have in fact been falling since May, when there had been a temporary surge of property onto the market. Different factors could be driving the low level of instructions, including a reluctance to trade up amid current uncertainties and the fact that low unemployment is limiting the number of forced sales. The overall result is that the stock of unsold homes is still relatively low, and this is providing some residual support to prices. The underlying dynamics of the market, however, are clearly not as strong as this time last year.

IMF report on overvaluation raises important issues, but undersupply cannot be ignored

“Recent analysis from the IMF on housing markets in the industrialised world has added to the debate about housing overvaluation. In its latest World Economic Outlook, the IMF concluded that a substantial proportion of UK house price gains over the last decade could not be entirely explained by income growth, interest rates, credit growth and the working-age population. However, this estimate of overvaluation will not account for other key drivers such as the housing supply. A simple comparison shows that investment in residential construction accounts for a much smaller share of the economy in the UK than elsewhere, despite the fact that the population has been growing strongly and is projected to continue doing so. As the NHPAU reminds us, the UK’s unresponsive housing supply has been instrumental in driving house prices and affordability ratios to current levels.