UK house prices continue to fall in September

House prices continued to fall gently in September even though the level of new buyer interest and mortgage approvals was rising strongly at the end of the summer.

The Nationwide building society reported that house prices fell by 0.2 per cent in September, leaving average prices in the UK only 1.8 per cent higher than in September last year, a nine year low.

The annual rate of house price inflation fell from 2.3 per cent in August and there was no increase at all in the past three months.

Activity in the housing market, however, has picked-up. Bank of England figures show that the number of mortgages approved in August by lenders for people purchasing property was 107,000, an 8,000 increase on the previous month and well above the 94,000 average of the past six months.

Mortgage approvals are now close to their average in this decade and considerably higher than the average of the 1990s.

The apparent contradiction between strong demand for property and stagnant prices is most easily explained by households feeling comfortable with the high levels of property prices charged in the market at present.

Stephen Nickell, one of the members of the Bank of England’s monetary policy committee, said last week that he believed there were three plausible justifications of the current unprecedented level of house prices compared with incomes.

First, interest rates, after adjusting for inflation, had fallen sharply since the 1990s, raising the sustainable level of house prices. Second, the bank’s headline interest rate was also low, lowering the cost of servicing mortgage debt in the early years of a mortgage. And third, the levels of house building were historically low.

Even the most gloomy analysts questioned their assumptions. Ed Stansfield of Capital Economics wrote in a note: “On the face of it, the latest surge in mortgage approvals suggests that house prices are more likely to rebound over the next few months rather than fall further as we expect”.

But he stuck to his guns, predicting a renewed bout of pain in the housing market because the he believed the housing market remained overvalued. “There is every chance that approvals will fall back in due course.”

Not every aspect of the Bank of England’s lending figures were consistent with a sharp rise in new buyer interest. The amount of additional mortgage borrowing increased a little on the month to £7.6bn from £6.7bn in July, but it has fallen significantly from its highs of last year.

The annual growth in outstanding mortgage debt is now running at a rate of 10.3 per cent, down from about 15 per cent a year ago.