What’s happening to house prices?

House prices have risen for nine consecutive months, but will this continue and is now a good time to buy. Clare Francis speaks to Nationwide’s Chief Economist, Martin Gahbauer about his views on the current market...

Clare Francis: I’m with Martin Gahbauer who is the Chief Economist at Nationwide Building Society to ask him about the outlook for the housing market.

Q1: So Martin, your latest House Price Index showed that house prices continued to rise in January, and they’re now 8.6% higher than this time last year. Has the market bottomed out do you think?

Martin Gahbauer: Well it’s been a pretty impressive run since house prices reached a trough back in early 2009 - they’ve now risen 9 months in a row. I think what’s happened is that we’ve had a big shortage of property available for sale on the market, that has driven up prices but I think in many ways the market hasn’t really returned to normal.

If you look at the number of transactions taking place there are still far fewer properties changing hands then was the case before the economic crisis, and it’s still difficult for many people to afford a home, so the level of demand in the market is still very low but because interest rates have dropped to such record lows, few people are under pressure to sell or to move – many have a big cash windfall from cheap mortgages and many are just staying put. That means few properties out there - and few buyers competing for even fewer properties.

Q2: So it’s the shortage of supply that’s pushing prices up at the moment?

MG: That’s what we think, and it’s difficult to know how much longer that can continue. We think that interest rates probably will remain low this year, it seems like the Bank of England is in no rush to raise interest rates because it’s worried about sending the economy back into a downturn, and that’s probably supportive for house prices, but we do have to ask ourselves the question, ‘what will happen one day when interest rates do begin to rise?’

If they were to rise quickly that may cause some additional problems in the housing market but for now things seem to have stabilised.

Q3: And, obviously we are heading towards spring and traditionally it’s a time of year where the market tends to pick up and activities tend to pick up. Do you think we could see the supply / demand issue ease a bit as more people put their homes on to the market in the coming months?

MG: Yes, I would expect that to be the case, slowly. There has to be some sort of natural level of supply, simply because people do eventually do need to move, if they have children, or just larger spatial requirement, or they inherit property after a family member has passed away. There are all sorts of reasons why property eventually does come onto the market, and I think over the next year or so we will probably get a more natural level of supply, demand might pick up a bit as well as the economy recovers and as issues with the banking system slowly begin to loosen, but it is hard to judge how that supply / demand balance will play out.

Q4: And the annual rate of growth at the moment is about 8.6%, do you have a forecast for the year?

MG: I think for this year, prices are quite likely to flatten out. At the moment there is still quite a bit of upward momentum, but given where prices are in relation to earnings and the limit that puts on the upside potential, and the possibility of more pent-up supply coming to the market, I think that means that some of the upward momentum will be lost, and the most likely outcome is a flattening out.

CF: Great, thank you Martin.

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