House price falls may lead to further rate cuts

House prices fell by 2.5% during May, the largest fall recorded by Nationwide since its index began in 1991.

The average UK house price is now £173,583, according to Nationwide, down from £178,555 in April. This is a monthly change of -2.5% and signals the longest consecutive period of monthly falls (seven) since 1992. The index also recorded a 4.4% annual fall, the biggest since December 1992, when prices were falling at an annual rate of 6.3%, according to Nationwide. However, thanks to strong growth up until last year, prices are still 5% higher than two years ago and 10% higher than three years ago.

Fionnuala Earley, chief economist at Nationwide, blamed problems in the credit markets for the drop in property values. She said: “Tighter credit conditions in the [mortgage] market at present are making it more difficult for borrowers to obtain loans at higher loan-to-value ratios. While this is frustrating for those in that position, more stringent underwriting criteria should ultimately lead to fewer overstretched borrowers and hence a more stable and sustainable market.”

Earley added that continued falls could put pressure on Monetary Policy Committee (MPC) members to vote for rate cuts later in the year. “Stronger than expected inflation appears to have shattered hopes of an early cut in the Bank Rate in June, but more downbeat economic and housing market data could lead more MPC members to join David Blanchflower in voting for pre-emptive cuts.”

Peter Bolton King, chief executive of the National Association of Estate Agents (NAEA), highlighted the differences among many regions of the UK. “The national sales figures do not tell the whole story,” he explained. “We know from our members that the picture is still very regional with some areas continuing to do better than others.

Bolton King added that the issue was one of confidence “There is no denying that the credit crunch and tighter economic factors have affected confidence in the market but it is still important to remember that the underlying factors that support the property market remain: low unemployment, historically low interest rates and a latent demand for houses.”