Nationwide has released its latest House Price Index, which suggests prices are rising at their fastest rate since 2005. So how does the Building Society predict house prices will fare for the rest of the year? Let’s take a look. [top_pitch]
What does the latest House Price Index reveal?
Nationwide has revealed that annual house price growth increased to 11.2% in January, which is even higher than the 10.4% reported in December.
This 0.8% month-on-month increase means we are seeing the strongest start to the year for the housing market in 17 years. According to Nationwide, the average house price now stands at £255,556.
Robert Gardner, Nationwide’s chief economist, says its latest figures reveal that the demand for housing remains strong. He explains: “Housing demand has remained robust. Mortgage approvals for house purchases have continued to run slightly above pre-pandemic levels, despite the surge in activity in 2021 as a result of the stamp duty holiday, which encouraged buyers to bring forward their transactions to avoid additional tax.”
Gardner goes on to explain how the number of property transactions is nearing record levels. This is despite the UK’s low levels of housing stock.
He explains: “The total number of property transactions in 2021 was the highest since 2007 and around 25% higher than in 2019, before the pandemic struck.
“At the same time, the stock of homes on estate agents’ books has remained extremely low, which is contributing to the continued robust pace of house price growth.”
How is the housing market forecast to fare in 2022?
Average house prices are roughly £25,000 higher than they were a year ago. As a result, many budding homeowners will be eager to know whether the housing market will cool this year.
According to Nationwide’s Rob Gardner, while house prices might not crash in 2022, prices may (finally) begin to cool. He explains: “While the outlook remains uncertain, it is likely that the housing market will slow this year. House price growth has outstripped earnings growth by a wide margin since the pandemic struck and, as a result, housing affordability has become less favourable.”
Gardner warns that the typical deposits needed for first-time buyers are already stretching budgets. He suggests that this cannot continue indefinitely. He explains: “…a 10% deposit on a typical first-time buyer home is now equivalent to 56% of total gross annual earnings, a record high. Similarly, a typical mortgage payment as a share of take-home pay is now above the long-run average, despite mortgage rates remaining close to all-time lows.
“Reduced affordability is likely to exert a dampening impact on market activity and house price growth, especially since household finances are also coming under pressure from sharp increases in the cost of living.”
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How will inflation impact house prices this year?
Inflation is currently running at 5.4%, according to the latest ONS figures. To tackle rising inflation, the Bank of England can raise its base rate. It last did this in December, increasing the rate from 0.01% to 0.25%. Markets expect the bank’s Monetary Policy Committee to act again when it meets on 3 February.
If interest rates do rise again, then borrowing will become more expensive for lenders. This should encourage lenders to cut back on cheap mortgages. This is important as offering fewer cheap mortgages restricts what buyers can borrow, or how far they can stretch their budgets.
While this may appear like a bad thing, mortgages becoming more expensive could have a downward impact on house prices. That’s because stricter lending criteria means there will be less cash chasing each property.
According to Rob Gardner, inflation can potentially impact house prices more generally. He explains: “This rapid rise in inflation has been an important factor denting consumer confidence in recent months, especially how people see their own personal financial situation evolving, although as yet, this has done little to dent housing market activity.”
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