The latest economic forecast by Nationwide predicts that house price inflation will drop from the current rate of 9.7% to 0% by this time next year. A slower economy, stretched affordability, tighter credit conditions and lower buy-to-let demand will all take a bite out of house price inflation.
Interest rate cuts and tight supply are expected to provide some support to price growth, but are unlikely to prevent a significant slowdown. Scotland is forecast to have the strongest house price growth in 2008, while prices in Northern Ireland are forecast to fall somewhat.
Commenting on the forecast Fionnuala Earley, Nationwide's chief economist, said: "House prices recorded another strong year in 2007, underpinned by significant economic momentum, ongoing housing shortages and strong buy-to-let demand. We forecast house price growth of 5-8% in December last year, and with two months left to go it looks like the middle to upper end of this range will be achieved. That being said, momentum is now fading, and a number of factors suggest that house price inflation will drop from its current rate of 9.7% to 0% by this time next year. The main reasons for this more subdued outlook lie on the demand side of the market, where a slowing economy, tighter credit conditions, stretched affordability for first-time buyers and lower house price expectations appear likely to reduce the level of activity. The supply-side of the market will still be characterised by widespread housing shortages, in spite of government targets to increase house building. These shortages will provide some offsetting support to prices amid the weaker demand environment, particularly in the south of the UK."
"House prices have now risen in excess of earnings for 11 of the past 12 years. For a considerable period of time, this had only a limited impact on the affordability of monthly housing costs, as interest rates fell to record lows. But now that interest rates have risen by 1.25% since August 2006, mortgage payments are taking an increasingly large share of take-home pay, particularly for first-time buyers. The ratio of first-time buyer mortgage payments to take-home pay is now close to an all-time high, and there appears little room for it to climb further in a slowing economic environment. For affordability to come back to long-term norms, either earnings growth needs to outpace house price inflation or interest rates need to come down. Although we believe interest rates have peaked, they are only expected to come down slowly, as inflation expectations are lifted by high oil and food
prices, and the beneficial impacts of cheap imports from China begin to fade. For this reason, house price inflation will need to lag earnings growth next year, and this is a key driver of the overall forecast."
