MPC key as house prices drop

House prices grew at their slowest rate for almost nine years in June, Nationwide has said today.

However, the immediate future of house prices is very much in the hands of the Bank of England's Monetary Policy Committee (MPC) - which sets interest rates.

Examining its mortgage data for June, Nationwide discovered that the average house in the UK cost £157,791 - this is just 4.1 per cent higher than the same month last year, the slowest rate of house price growth since July 1996.

"Temperatures soared on centre court, but there is little in the housing market this month to attract attention away from tennis. While the weather was hotting up, house prices in June cooled, falling by 0.2 per cent when adjusted for seasonal factors," said Fionnuala Earley, Nationwide's group economist.

"The trend over the last three months shows the almost horizontal path of price growth this year. Prices in the three months to June were 0.8 per cent higher than the previous three-month period," she added.

And Nationwide sees affordability as the driver of this house price growth.

When house prices are rising quickly, the effect of falling affordability is reduced by buyers' optimism that rising property values will counteract the increased debt, Nationwide said.

But with house prices broadly flat for close to a year, with the average price rising just £4,000 over 12 months, the biggest impact on affordability has been in increases in the cost of borrowing.

The Bank of England raised interest rates five times between November 2003 and August 2004 - and once house prices stopped rising the impact of these increases on the property marked kicked in.

The number of people buying and selling houses has fallen 20 per cent since the same time last year, but with few people being forced to sell due to economically distressed reasons, and interest rates flat since August, house prices have not - and in all probability will not - fall quickly.

This has led to a stalemate developing between buyers faced with the increased cost of houses, and sellers unwilling to give up on any of their recent gains in the value of their property.

While rising wages will eventually counteract high house prices, the thing that will stimulate house prices and market activity fastest is a cut in the interest rates.

"This [stalemate] cannot continue indefinitely and price expectations will adjust," predicted Ms Earley.

"Activity levels too seem to have stagnated. After picking up in the early months of the year, the number of approvals for house purchase increased slightly in May to 96,000. Nationwide expects activity to continue at about this level through the summer," she added.

"Nationwide's index shows that affordability is deteriorating, but if interest rates do move south in the Autumn, this will improve and may mean that only small price adjustments will be necessary to bring some liquidity back to the market."

The Bank of England's MPC meets on Thursday. The minutes of the last meeting show that it is increasingly considering cutting interest rates, but the decision is finely poised with consumer spending and international economics also in the mix.

Ms Earley commented: "The future path of interest rates is at the top of the agenda. The shift in opinion revealed in the MPC minutes was a surprise, but arguments about whether a move in interest rates is warranted remains finely balanced and is not decisively weighted in favour of the doves yet.

"Rather like watching Andrew Murray, we will have to wait for another set (of data) to see what will happen. Will consumers hold on or have they run out of steam?"