House price growth at nine-year low

House price growth at nine-year low

House price inflation has fallen to the lowest level in nine years, the Nationwide said yesterday, adding that prices are already falling in London and the south-east.

Analysts warned that house builders had cut prices of newly built homes sharply in an effort to shift unsold stock.

The Nationwide said the price of the average house rose 0.3% last month to stand 5.5% higher than in May last year - the smallest annual increase since August 1996. The average price is £157,272. The mortgage lender said this was in line with its view that the market is cooling gradually rather than collapsing.

But its survey confirms the view of the Bank of England's monetary policy committee that its five increases in interest rates to 4.75% between November 2003 and August 2004 has taken the heat out of the market. Fionnula Earley, a Nationwide group economist, said: "The consensus is now that [interest] rates have peaked. But this does not suggest that the market will pick up again rapidly, rather that it will continue gently to cool."

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She acknowledged, however, that prices were falling in some areas. "This is confined to London and the south-east but there may be other localities where there could also be modest falls."

House prices in the capital have traditionally led the rest of the market, and some economists think it inevitable that the weakness in prices will spread to other regions. Experts are divided between those who foresee a sustained period of stable prices and those who think there could be a protracted slump.

The boom has seen the value of homes triple in seven years, driven by falling interest rates and rising incomes and employment. That has pushed the ratio of house prices to average earnings to an all-time high.

Ed Stansfield, of Capital Economics, said: "With signs that the abrupt slowdown in consumer spending has begun to spill over into the labour market now evident, tax increases in the pipeline and mortgage demand remaining subdued, it seems probable we are still in the early stages of a protracted housing market correction." Mr Stansfield and Milan Khatri, chief economist at the Royal Institution of Chartered Surveyors, said there was growing evidence that house builders were finding it increasingly difficult to sell new homes. Government figures show house building in England has increased by almost a fifth since 2001, although by much more in London.

Mr Khatri said construction firms were still building plenty of houses and flats in London, despite the market peaking last year. They were resorting to incentives such as paying stamp duty or the first year's mortgage to encourage buyers.

"The new-build market is under much more pressure than the traditional market. It's not collapsing but it is cooling sharply," he said. He pointed to Land Registry figures showing that all property prices were down 0.8% be tween last September and now while new build had fallen 2.1%, a figure which did not include the added incentives which could well knock another 1-2 percentage points off.

Mr Stansfield said some figures showed that apartment prices, the sector most exposed to the low levels of first-time buyer activity, and the buy-to-let market were down 17% on a year earlier. He said the diver gence between the various measures of house prices could not persist. "With evidence of price falls in some sectors and the consumer slowdown looking here to stay, we still think it more likely that the stronger [measures] will take a marked downward trend in coming months," he said.

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