Financial Market

UK house price inflation has fallen to its lowest rate for twelve years, with consumer confidence at its lowest since 1993. Subsequently the UK housing market could see its first declines since then as a result.

One of Britain’s largest lenders reported that prices in March fell 0.6% on February, bringing annual growth predictions down to just 1.1%.This forecast also marked the lowest annual growth prediction since March 1996.

Predictions are that UK house prices will now continue to fall further, and that the marked has see a stark shift since summer of 2007.

“Expectations of higher house prices will have undoubtedly encouraged some speculative demand in the housing market over the years, but with lower house price growth expected now and in the future, the effect will work the other way, causing at least some of this demand to fall away,” - Fionnuala Earley, Nationwide’s chief economist

The average UK house price was now £179,110 up only £2,2027 on the same figure last year. Over the last two years however these prices remain up 11% and up 47% in the last five years.

However price are generally predicted to see a further fall throughout the course of 2008.

“A moderate fall in prices at this stage should not be unwelcome and should help to ensure greater stability in the market going forward.” - Fionnuala Earley, Nationwide’s chief economist

Yesterday Nationwide put up the price of its fixed rate and tracker mortgages which account for 90% of new home buyer mortgage deals, amid increased inter bank, or Libor, lending costs.

A continued dampening in the housing market could also set the stage for a rate cut from the Bank of England as early as next month.

“We think these latest developments, along with the continued weakening in the housing market, will mean that the MPC will bring forward its rate cut to April.”

A report from mortgage lender Halifax has released data the shows stamp duty for first time buyers has risen 82% over the last five years, in line with soaring house prices.

In 2007 the average bill was £1,751 compared with just £960 in 2002.More interestingly nearly all first time buyer in the South West, South East and East London were liable to pay stamp duty, while only 42% of first time buyers in Northern regions had to pay.

In London it is even worse news for first time buyer with the average stamp duty bill increasing by 364% over the last five years to £8,675.

The government has highlighted that as part of plans, half of all first time buyers will pay no stamp duty this year, and the lowest 1% tax band hits houses of value between £125,000 and £250, 000. Houses with a value between £250,000 and £500,000 will have a 3% charge, whilst properties above that bracket incur a 4% charge.

“Stamp duty has again become an issue for first-time buyers because the stamp duty thresholds have not kept pace with house price inflation.” – Martin Ellis Halifax chief economist

Mr Ellis went on to acknowledge that the government has raised the 1% threshold in recent years but said the government needed “to raise the stamp duty thresholds to compensate for house price inflation over the past decade”.

There is light at the end of the tunnel however for first time buyers, with the survey showing UK house prices did fall by 0.3% in February.

A sixteen year high, that’s the level of inflation the UK is currently experiencing for goods leaving UK factories according to January’s report released by the Office for National Statistics.

Annual output inflation reached 5.7% in January up from 5% in December, with the price of goods leaving factories up 1% and prices paid by factories for raw materials also continuing to rise, now up 18.7% over the past 12 months.

According to ONS data the surge recorded in January is due to the further increasing prices of crude oil which is up 70.3% on the year, and the spiralling costs of home grown food up 36% - a record high.

Core output inflation which strips out the effects of both rising fuel and food prices, has also risen faster than expected, up 0.8% this month and 3.2% on the year.

The report will certainly be of concern to the monetary policy committee at the Bank of England, and could prevent any further planned rate cuts being made in a bid to stave off UK recession.

“We had been expecting a further increase in output price inflation, but these figures are unequivocally awful,” said Philip Shaw, economist at Investec. “The scale of worsening of factory gate inflation highlights the MPC’s dilemma with monetary policy over the remainder of the year. It is having to grapple simultaneously with a slowing economy and a worsening inflation background.”

This news comes at a time when comparable housing market data also show continued slowdown throughout January, a sign that the once lucrative property market is beginning to loose momentum. House prices rose 9.1% in January down from 9.7% in December.

Amid growing recession concern the ONS also released figures showing Britain’s trade deficit gap in December was £7.574bn, higher than the predicted figure of £7.35bn.

The UK property market is continues to experience a cooling down period after prices fell by 0.8% in November according to government figures released recently. These figures were in contrast to Octobers figures were a 0.1% rise in UK house prices was recorded.

The annual rate of house price inflation stood at 9.5% which saw a 1.8% decline on figures from the previous month. Over the three month prior to November figures fell from 11.1% to 10.5%, a more reliable indicator of overall housing price trends.

The decline in figures pushed the average UK house price down from £220,195 in October to £218,330. These average house price figures are based on sale completions and for that reason are behind other house price indexes.

The Nationwide HPI states a third month decline for January of 0.1%, whilst it states house price inflation lies at 4.2% for January 2008.

Whichever HPI is looked at, most property surveys are showing a slowing market as a result of tighter credit conditions and affordability constraints brought on by the global credit crunch.

Research compiled by the Halifax bank and Nationwide building society has showed a weakening of house prices in December in accordance to the government survey. Upon the news many market experts are predicting a flattening market in 2008, with some competitors even predicting prices will fall.

One competitor, Capital Economics, has even predicted gain seen in the housing sector over the last 18 months to effectively be nullified, with a 5% fall in 2008 and 8% fall in 2009.

“Further weakness in the housing market is likely over the coming months,” said Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors.

Rates were cut in December and held this month, but many are expecting another rate cut from 5.5% in February. There will also be additional continued strategies throughout 2008 to encourage first time buyers into the market which will help underpin house prices.

Upon news that the UK housing market will stagnate in the next twelve months and the prediction that house will not rise for the first time in ten years, it seems that the increasing pressure on first time buyers may be relieved, even if only temporarily.

In addition to this news Halifax last month released figures detailing falling house prices for the third consecutive month.

However first time buyers wont be as happy to know that house prices will fail to drop to the levels seen in the recession of the 1990’s due to ‘high employment levels and sound economic fundamentals’, and is widely predicted the volume of property transactions would carry the brunt of the slowdown, expected to fall by 15 percent.

Claims of a slowing economy were further backed up with a survey claiming high street sales are growing at their slowest rate for almost a year, and restaurants and pubs are suffering, as indebted consumers stop to think. As Britain now accounts for more than two-thirds of the EU’s entire credit card debt, spending trends are even more reliant on Bank of England changes.

In response to a slowing economy and subsequent cooling off in the housing market, the Bank of England recently cut interest rates to 5.5 percent.

With this cut in interest rates it seems consumers are more willing to spend in the high street, with this pattern trickling through to the housing sector in due course, reducing the expected impact on dropping buying levels.

But with this cut dubbed the first of a series of interest rate cuts a new threat emerges, and the battle for the monetary policy committee now is trading off the threat of inflation to the threat of a slowing economy.

It is true inflation is becoming an increased worry for many experts and with goods leaving factories reaching there highest prices in 16 years, last months output price annual inflation hit 4.5 percent, up from 3.8 percent in October.

A slowing economy eases inflation, and the five interest rate rises of 2007 were intended to curb it, but inflation is still up. In the event of more interest rate cuts we will only see a boost to consumer spending to sustain a slowing economy temporarily, resulting in even greater pressures on inflation.