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Slower price growth hints at a cooling market

Slower price growth hints at a cooling market

Category: Mortgages

Updated: 03/06/2014
First Published: 03/06/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Despite widespread concerns that the housing market is heading into bubble territory, several reports released over the last few weeks have indicated that it could actually be starting to stabilise. The latest Nationwide house price index adds to that tally by revealing more modest house price growth than has been witnessed in recent months, which ideally will further help to dampen some of those bubble fears.

According to the figures, UK house prices increased by 0.7% in May to reach a national average of £186,512. This helped the annual growth rate edge up to 11.1% – meaning the typical house is now £18,600 more expensive than it was in May 2013 – but despite this both the monthly and quarterly growth rates are showing tentative signs of moderation.

In April, for example, prices increased by 1.2% over the month, making this month's 0.7% figure seem a lot more stable. Prices have risen by 2.3% in the last three months, compared to April's quarterly growth rate of 2.5% and March's figure of 2.8%, providing further indications that the market is starting to cool.

And, with some other measures recording slight drops in monthly house price growth – such as ONS figures which reported a drop of 0.5% in March – not to mention the significant fall in mortgage approvals since January's peak, it would certainly appear that the market is starting to stabilise.

It's thought that the Mortgage Market Review, or MMR, could have something to do with it. New rules were implemented in April which have significantly tightened affordability criteria, meaning any borrowers need to prove that they can comfortably afford mortgage repayments now as well as when rates rise.

Other factors will of course have come into play as well, with some arguing that the market is simply starting to resist higher prices. Figures from Hometrack, for example, have revealed that the average time a property remains on the market is starting to increase (rising to 6.5 in May from 6.3 the previous month) with the growth in demand beginning to moderate, while the proportion of postcode districts registering price increases actually slipped from 50% to 42% over the month.

"There are already signs of slower activity in the mortgage market and we expect to see further signs of slowing house price momentum in the months ahead," said Richard Donnell of Hometrack, with the figures revealing a clear slowdown in overall house price growth akin to that reported by Nationwide – prices increased by 0.5% in May, compared to 0.6% growth in both April and March.

Commenting on the latest figures, Robert Gardner, Nationwide's chief economist, said: "House prices recorded their thirteenth successive monthly increase in May, rising by 0.7%. [However] there have been tentative signs that activity in the housing market may be starting to moderate, with mortgage approvals in April around 17% below January's high.

"It is too early to say whether nationally this is indicative of a cooling trend in the wider market. The slowdown may partly be the result of the introduction of Mortgage Market Review (MMR) measures, which may take a few months to bed down. The underlying pace of activity should become more evident as we move through the summer months and the impact of MMR becomes clearer."

Happily, though, the report also revealed that first-time buyers are a driving force in the recovery of the housing market, accounting for 48% of house purchase activity in March. The support of the Help to Buy scheme is arguably a key factor, but the figures would suggest that it isn't having the inflationary effect on house prices that was feared, as Mr Gardner added:

"The modest numbers involved so far suggest that Help to Buy is unlikely to be the main factor behind the recent pickup in the wider housing market. For example, 12,853 Help to Buy mortgages were completed in Q1 (6,327 under the mortgage guarantee scheme and 6,526 under the shared equity scheme), equivalent to around 9% of total mortgage completions over the period."

Furthermore, the scheme has had less of an impact in London, where prices are rising fastest – Help to Buy accounted for just 4% of completions in the capital during the first quarter of the year, with much of the scheme's support being concentrated in regions such as the North of England where house price growth has been less marked.

Time will tell whether house prices continue to moderate over the coming months, but the general consensus seems to be that the market could be heading towards stabilisation – rather than overheating – with this kind of sustainable growth being good news for all concerned.

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