Nationwide predicts little house price growth in 2005

House prices are predicted to rise by only 2% in 2005, says Nationwide, suggesting a significant slowdown in the housing market is on its way.

Property forecasts indicate the market has slowed dramatically and will continue to do so throughout next year, after a five-year rally which has seen all house prices in the UK at least double.

Whereas house prices has seen the most aggressive growth in the North over recent months, the tables will turn again slightly in the next 12 months as London, Scottish and the Outer Metropolitan borough property prices are predicted to rise by 3% compared with 2% in the North and elsewhere, while only Northern Ireland will see the highest growth of 4%, suggest Nationwide.

This again compares with property price growth in November 2004, which climbed an average 1% in one month alone to give a seasonally adjusted annual UK growth rate of 15% against October’s 15.3%, but is now expected to end the year at around 13-14% and below last year’s run-away growth rate of 16%.

A typical UK property now costs £153,439, however, the slowdown is now predicted as Alex Bannister, chief economist at Nationwide, suggests a stronger jobs market in the North earlier this year may have been the catalyst which kept house prices along with ‘over-optimism’ of future price growth expectation.

According to Nationwide, net mortgage lending is also likely to drop by at least a quarter as a result of the reduction in house price inflation, from £99bn in 2003 to £73bn in 2005.

This is despite what also appears to be an increase in the number of properties now being built too, as 171,000 private sector properties were completed in 2003/04 compared with 153,000 in 2001/02, and the number of ‘new starts’ this year suggest that trend will continue.

Despite the predicted slowdown, Bannister is backing calls suggesting the base interest rate has peaked, adding the economy will not push property values into negative equity.

“Although economic growth dipped recently in the UK and US, we expect this to prove to be a ‘soft patch’ as opposed to a more serious slowdown. We forecast that the UK economy will grow by more than 3% in 2004 and by around 2.5% in 2005,” says Bannister.

“Over recent weeks it has become apparent that financial markets now believe there to be a good chance that the base rate has already peaked in the current cycle, at just 4.75%. The financial markets are currently pricing in short rates of just 4.75% in December 2005.

“However, although inflationary pressures are likely to remain muted for some months to come, concerns remain around the possibility of inflationary pressure feeding through to the high street from a combination of rising producer prices and a lower exchange rate, and also via rising wage pressure which may yet result from the tight jobs market,” adds Bannister.

As a result of the potential pressures explained, Bannister and his team is predicting interest rates could reach 5% in 2005, while initial mortgage payments as a percentage of take home pay growth will rise only a fraction from 30% at present to 31% in 2005 – far from the 39% reached in the early nineties.