Thursday, May 27 2004

The rapid rise in house prices has continued throughout May, with the price of the average house increasing by 1.9% during the month, according figures published by Nationwide this morning.

However, in spite of continued growth, Nationwide has predicted that the market will slow over the second half of the year. This is due to a combination of relatively muted post tax earnings growth (up 1% year-on-year in March) and rising interest rates. The mortgage lender’s house price forecast for the 12 months to December of 15% implies an average monthly rise of just 0.7% for the remainder of the year.

The current market expectation is that interest rates will rise to 5.30% from the current rate of 4.25%, although Nationwide expects that a rate of 4.75 by the yearend will be sufficient to meet the inflation target.

Alex Bannister, Nationwide’s Group Economist, said: ‘The likelihood of a potentially drawn out period of low house price inflation is rising. Some have argued that if house price inflation fell to low single digits or even zero there would be a significant risk of price falls.’

‘However, there are several examples of low house price growth not leading to subsequent price falls. In the absence of a recession and large increases in unemployment, significant downward pressure on prices would be unlikely.’