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Rent Guarantee | Surprise jump for UK property prices last month, latest figures show

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UK residential property prices increased by 1.3% in August, the largest monthly increase since January 2010, the latest figures from the Nationwide Building Society show.

It means that price declines in the previous two months have been reversed and they are now just 0.7% lower than a year ago and it takes the average price of a typical home to £164,729.

‘Given the difficult economic backdrop, the extent of the rebound in August is a little surprising,’ admitted Robert Gardner, Nationwide’s chief economist.

He said people should not read too much into one month’s data, especially since monthly price changes have been impacted by a number of one off factors this year, such as the ending of the stamp duty holiday for first time buyers.

‘These are factors that cannot be controlled by the usual process of seasonal adjustment. Nevertheless, the fact that the annual pace of house price decline moderated to 0.7% in August from -2.6% the previous month provides evidence that conditions remain fairly stable,’ he explained.

‘This may be explained by the surprising resilience evident in the UK labour market, with further increases in employment in recent months, even though the UK economy has remained in recession,’ he added.

He also pointed out that the most dramatic change in the market is in the level of activity.

‘For example, the average number of mortgage approvals is currently running at around 50,000 per month, around half the level prevailing over the 2005/2007 period,’ said Gardner.

Interestingly, the share of mortgages taken up by first time buyers has actually increased slightly to 39% of the total, up from the 37% prevailing in the pre-crisis period,’ he explained, adding that the more cautious approach of borrowers and lenders is evident in the increase in the average deposit from 10% to 20%.

But affordability has improved on a number of metrics. Interest rates on both fixed and variable rate mortgages have declined. Together with a modest decline in house prices and a steady rise in average earnings, the monthly repayments for a typical first time buyer with a 20% deposit have declined to around 29% of take home pay, down from 40% before the crisis.

‘In practice the decline is slightly more pronounced than this. Borrowers, especially first time buyers, have been increasing the term of their mortgage in recent years. The average term for first time buyers is currently 28 years up from 25 years over the 2005 to 2007 period. While this increases the total amount repaid over the term of the loan, it lowers the monthly repayments,’ said Gardner.

Looking forward, Gardner believes that the fortune of the housing market is likely to be closely tied to the trajectory of the wider economy.

‘The number of housing transactions should pick up as the UK recovery gathers pace in the years ahead, though this is likely to be a gradual process,’ he said.

‘Policy measures aimed at supporting the availability of credit and lowering the cost of borrowing, such as NewBuy and the Funding for Lending scheme, should help to provide support. However, much will depend on developments in the labour market. Increased job security, lower unemployment and stronger earnings growth will be needed to generate a sustained upturn in activity,’ he explained.

‘Though uncertain, a modest further improvement in affordability is likely. Interest rates will not remain at current lows forever, but rate hikes still appear some way off. House prices are expected to remain fairly stable over the next two years, while incomes are likely to continue to rise gradually, which will also help to support affordability,’ he added.

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