Market turmoil is unlikely to hit house prices hard in the short term but there are longer term risks, according to Nationwide.
The bank says the house price growth rate rose 0.6% during August but the annual rate fell from 9.9% to 9.6% in July. The average house price reached £183,898 in August, a £16,177 rise on one year ago.
Fionnuala Earley, chief executive at Nationwide, says the bank expects house prices in 2007 to grow between 5% and 8%.
She attributes the slow down to weaker affordability, rising interest rates and lower house price expectations.
She says: “While it has taken some time for these factors to bite, there are now clearer signs of slower demand in the market reflected in the collapse in new buyer enquiries.
“In addition, the stock-to-sales ratio, which leads house price inflation by five to seven months, predicts a continued slowing in the annual rate of house price inflation.”
She says the US sub-prime crisis’ long term impact on the housing market would depend on the time it takes for markets to settle.
She says: “A prolonged financial market downturn would be uncomfortable for the overall economy given the importance of this sector to economic growth over several years.
“Such a downturn would not only affect investment bankers, but would also have negative knock-on effects for legal, accountancy and other professional services that have benefited from the structured credit boom.
“The impact on London property prices can only be negative compared to the current situation, particularly at the top end, but employment generated from Olympic and other infrastructure investment along with supply issues will remain positive factors for the mainstream market."
She says the overall extent of damage to economic growth will depend how long it takes for the Bank of England to respond to the credit crunch and monetary policy.
She says: “August’s inflation report signalled that a rise in the bank rate to 6% was pretty much a certainty. But the bank’s forecast of inflation did not predict a dip below the 2% target at any point over the next two years, even based on market rates rising to 6%. So, the fall in inflation to a sub-target 1.9% in July will have come as a surprise.
“The turmoil in credit markets strengthens the case of the doves on the committee as the Monetary Policy Committee will be reluctant to do anything to add uncertainty while the markets remain volatile.
“The Bank of England’s reluctance to intervene in the markets in the same way as the Fed and the European Central Bank suggests that at the moment it is fairly sanguine about the lasting effects of the credit crunch.
“But the longer the squeeze continues, the more likely it is to have a dampening effect on the wider economy and hence the outlook for house price growth next year.”
Yesterday the Land Registry said house prices in England and Wales have grown at the lowest rate since July 2006. The Land Registry House Price Index shows the average house price in England and Wales grew by 0.1% in July, bringing the average house price to £181,460.
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