Nationwide reports that annual house price growth slowed across the whole of the UK in the final quarter of 2007, while London saw the fastest rate of annual house price growth in England for the seventh consecutive quarter.
The 'ripple effect' is still evident as the North-South gap widened by £15,000 in 2007. Northern Ireland saw the biggest slowdown in annual house price growth, with the West Midlands being the most stable region. The average house price is now £183,959 and the annual percentage increase is 6.9%.
Commenting on the figures Fionnuala Earley, Nationwide's Chief Economist, said: "The annual rate of house price growth slowed in every part of the UK in the final quarter of 2007, bringing the average rate in the UK down from 9.3% to 6.9%. Price growth in Northern Ireland slowed most rapidly with the rate of growth falling to 24.2% from 42.6% in the third quarter. However, annual house price growth in the Province was still faster than anywhere else in the UK and almost twice as fast as the second fastest region, London. Scotland continued to outperform the UK for the seventeenth consecutive quarter. Prices in Scotland increased by 10.1% in the year to Q4 2007 compared with 12.2% in the year to the previous quarter. In Wales, prices increased by 4.2% over the year, less than half the rate of this time last year. However, Wales was one of the few parts of the UK that saw an acceleration in price growth during the last quarter. Prices increased by 1.5%, more than reversing the 0.3% fall in the third quarter. With the exception of Yorkshire & Humberside, all of the Northern regions of the UK saw an acceleration in house price growth during the last three months of the year. In contrast all southern regions saw a contraction in both the annual and quarterly growth rate. Northern Ireland and Yorkshire & Humberside stand out, with both recording a fall in house prices during the final quarter of 2007. Northern Ireland saw a 0.2% fall compared with a 2.9% rise in Q3. Yorkshire & Humberside saw prices fall by 0.2%, but this also follows relatively strong growth of 1.1% in the previous quarter. While the pace of annual house price growth in London slowed to 12.8% from 16.5% in the third quarter, it is still experiencing the fastest rate of growth in England and the second fastest in the UK. The slowdown in the capital's price growth during the final quarter was steeper than anywhere else in England. In the last three months of the year house prices increased by only 1.2% in London, compared to 3.3% in the previous quarter, although this still remains above the UK average of 1%.
Looking at the total stock of property against the number of households shows that there is an oversupply of actual dwellings in most parts of the UK. One might therefore conclude that supply is not an issue for the UK housing market after all. However, this is a crude measure which does not take into account second homes or those vacant or unfit for habitation. The South East and South West look supply-rich, but we know the biggest concentration of second homes are in these areas which would reduce the available supply balance by around half in each case. In addition, estimates of household and dwelling numbers are subject to much uncertainty and a small error in these estimates can lead to big differences in the overall excess or shortfall of the existing housing stock.
Even taking these flaws into account and assuming they have no regional bias, the pattern of the data still suggests that the areas where supply is more of an issue are in the South. While we cannot be completely sure of the size of the available housing stock, we can have a better idea of the likely demand and supply going forward. A broad measure of the extent of potential excess demand going forward is the difference between projections of the growth in number of households and the number of new properties expected to be built. Starting from the status quo, if there is an insufficient number of properties being built for the number of households being formed - or if the properties being built are in the wrong locations and of the wrong type - there will be an increase in pent-up demand. How this feeds through to house prices is not entirely clear cut. When affordability conditions are bad, fewer people may set up home than expected due to financial constraints. This reduces demand and thus upward pressure on house prices. But, with affordability having deteriorated for some time the number of these frustrated households may be larger than the projections suggest. This would add to pent-up demand and so be more supportive of house prices. There are, of course, also flaws in household projection data which make it difficult to be precise about the actual size of this pent-up demand. Uncertainty about the levels of net migration going forward is just one. But while we should be cautious about the accuracy of these projections, they are the best available estimate of potential demand from newly forming households available.
The latest data suggests that there is a big difference between building plans and the numbers of projected households. Current building plans in England fall short of the 240,000 government target by almost 40,000 units per year. With the average expected growth in the number of households expected to average 223,000 per year this leaves a shortfall of at least 22,000 and up to 55,000 if higher assumptions of migration are used. The biggest shortfalls are in London and the South East. Scotland and Northern Ireland do not appear to have a problem with the volume of homes available, but with recent rapid increases in price, the affordability of homes is more of an issue, particularly in Northern Ireland. While insufficient supply is supportive of house price growth, it does not mean that prices will continue to increase at the pace of recent years. In a period of poor affordability or uncertainty, demand can become more elastic and even those who want to start up an independent home can be frustrated by financial or other constraints. In the short-term supply issues are likely to provide some support in the areas where supply constraints are most critical, but over the longer term, the growth in pent-up demand is likely to mean that the market will turn around more rapidly once confidence and affordability have been restored to more usual levels."
