House prices rise for a fifth month

House prices rose for the fifth month in a row in September and are now at the same level they were at a year ago, according to the Nationwide building society.

Prices rose by 0.9 per cent to an average of £161,816 over the month on a seasonally adjusted basis after a 1.4 per cent rise in August. House prices rose by 3.8 per cent in the third quarter compared with the second quarter, the fastest three-month increase since 2004.

Compared with a year earlier, prices saw no change for the first time since March 2008.

Over the first nine months of this year, house prices have risen by 4.1%, although relative to the October 2007 peak prices are still down by 13.5%.

Martin Gahbauer, economist at Nationwide, said the upturn in prices over the last seven months had been “surprising” given the underlying weakness of the economy.

“Given that the housing market still faces considerable headwinds in the form of high unemployment, restrictive credit conditions and an impending withdrawal of the stamp duty holiday, it would be surprising to see house prices continuing to increase at the very strong rate seen in recent months,” he said.

All the key measures of the housing market have now returned to growth. The Halifax index showed a 1.7 per cent rise in the three months to August. The FT house price index has shown a 0.6 per cent rise over the same period and the Land Registry has shown prices rose in England and Wales between May and July before falling back slightly in August. Price increases have tended to be strongest in London and the south-east, and south-west and weaker in the north of the UK.

Mr Gahbauer said that one reason for caution over the housing market recovery – which has surprised many by displaying early signs of recovery as the recession has moderated – was that the number of homes being sold was still low compared with pre-crisis levels. The housing turnover rate – the percentage of the private sector housing stock changing hands – fell to only 3 per cent at the end of 2008. Since then it has recovered to 4 per cent, but is still well below the 7-8 per cent proportion seen before the downturn.

Normally, housing turnover is well correlated with house prices, but when there is only a small number of homes available on the market – as is the case at the moment – even a low rate of turnover can lead to rising property values, said Mr Gahbauer.

The big question for the housing market is whether it can maintain rising prices even when the supply of homes for sale increases. Mr Gahbauer said that the high number of so-called “accidental landlords” – homeowners who have been forced to rent out their properties rather than sell them after house prices collapsed during the downturn – had reduced the stock of homes for sale, and increased those available for rent. The glut of rental properties has driven down rents, even as house prices rise, suggesting that some landlords may seek to sell their properties rather than rent them

“Much will, of course, depend on how quickly supply shifts from lettings to sales and that demand conditions look like when it does. All else equal, one would expect, an increase in property available for sale to put downward pressure on house prices,” he said. “This need not be the case if the new supply is matched by new demand, but rising unemployment and tight credit conditions suggest that demand may remain sluggish in the near term.”