House prices drop as credit crisis continues

28 March 2008 / by Rebecca Sargent
House prices have dropped by 0.6 per cent in March, bringing the annual rate of house price growth down to 1.1 per cent, Nationwide has revealed.

The figures come amidst global financial instability and news that housing market activity is decreasing. The average cost of a house in the UK is now £179,110, just £2,027 more than this time last year, and according to Nationwide, prices will continue to fall.

Nationwide’s Consumer Confidence survey has found that since September, when house prices experienced a boom, consumers’ expectations of house price growth have fallen sharply, with consumers, on average, expecting a 3 per cent fall in the next six months. Fionnuala Earley, Nationwide’s Chief Economist said:

“This fall coincides with turmoil in the financial markets and is likely to have been compounded by the problems at Northern Rock, but it also reflects the signs of slowing in the more visible annual rate of house price growth and house purchase approvals data. House price growth expectations responded dramatically to all of these factors.”

According to Nationwide, consumers expectations can have an effect on the actual rate of house price growth, Fionnuala Earley continues: “When consumers think prices will rise there is a greater incentive to enter the market, thus supporting demand. On the other hand, if prices are expected to remain static or fall, the urgency disappears and demand will fade.”

These calculations from Nationwide are in contrast to its November forecast which predicted no change in house price growth. Fionnuala Earley explains: “Some of the downside risks we identified then have become a reality – most noticeably the continued turmoil in the financial markets. However, the path for house prices in 2008 still looks set to remain within our forecast range. We expect a modest fall in house prices during this year, but such a fall should be seen in context.”

Lenders are continuing to increase their mortgage rates as a result of financial instability, causing housing market activity to decrease, and leading to the evident fall in house price growth and expectation.

In support of Nationwide’s predictions, Simon Rubinsohn, chief economist at the Royal Institute of Chartered Surveyors (RICS), said that “There is little reason to believe that underlying problems facing mortgage lenders will ease anytime soon. As a result house prices are likely to continue to drift lower in the coming months.”

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