House prices slip in February snow

After nine consecutive monthly increases, there was a 1% month-on-month fall on the price of a typical UK property in February – a decline that may be explained by the snowy weather during the month, as well as by the expiry of the stamp duty holiday.

The three month on three month rate of inflation did remain positive however at +1.6%, although this is down from +2.0% in January and a peak of +3.7% in September last year. In terms of the annual rate of price inflation, there was an increase from 8.6% to 9.2% year-on-year, which can be explained by the fact that this month’s fall was smaller than at the same time last year (which was 1.5% m/m). All this conspired to mean that the average price of a typical property sold in the UK during the past month was £161,320.

At present it is too early to tell whether the figures for February are the start of a new trend or not; like other areas of the economy, the market suffered due to the adverse weather conditions and the expiry of economic stimulus packages.

Martin Gahbauer, Chief Economist, Nationwide, said:

“Even without the impact of stamp duty changes and the snowy weather, it would have been surprising to see house prices maintain the very strong upward momentum seen for most of 2009.”

“In light of low growth in household incomes and elevated levels of unemployment, house prices were beginning to move ahead of the recovery in general economic conditions. With the longer term stability of the market in mind, it would be a positive development for house prices not to become decoupled from the economic fundamentals.”

“A pause in the upward trend will also be a relief to potential first-time buyers who are no longer benefiting from the stamp duty holiday and for whom affordability had begun to deteriorate again over the course of 2009.”

However, new figures also show that since the middle of 2009 there has been an increase in the proportion of borrowers taking out variable rate loans over fixed ones.

In July last year, the proportion of new loans taken out on base rate tracker or discounted variable rate deals hit a low of just 14%. By December it had risen to 39%, with the proportion of fixed rate deals dropping from 80% to 54% over the same period. This ties in with figures from the Bank of England that reveal a 1.58% point gap between fixed and variable rate deals.

Martin Gahbauer added:

“It is not yet clear what has driven the steady increase in preference for variable rate deals. One possibility is that borrowers believe that base rates will remain low for longer than they did in July, making them more willing to take on interest rate risk over the course of the deal period.”

“Another possibility is that as house prices rose considerably over the course of 2009, new borrowers increasingly preferred to take out cheaper variable rate deals in order to keep their initial mortgage payments relatively low.”