The Nationwide Building Society has reported that UK house prices have recorded their largest monthly fall for seventeen years.
According to its latest monthly survey, prices fell by 2.5% in May making them 4.4% lower than May 2007, which has reduced the average UK house price to £173,583 – a reduction of £8,000.
Fionnuala Earley, the Building Society’s chief economist said, "The pace of house price falls accelerated in May as more weak economic news added to the gathering momentum of negative sentiment about the housing market and at seven months, this is also the longest consecutive period of monthly falls since 1992,"
Despite this she argued that the market was not heading for the same sort of crash as that seen in the early 1990s because fewer homeowners bought at the top of the market in this cycle which means a much smaller proportion of borrowers face the full effect of falls in prices than was the case in the 1990s. Also today's borrowers have typically put down a larger deposit than their 1980s counterparts.
The Nationwide is continuing to forecast single-digit house price falls during 2008, but Howard Archer, chief UK economist at Global Insight, painted a gloomy picture for some homeowners saying "It now looks more likely than not that house prices will suffer double-digit falls both this year and in 2009," he said.
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This is the seventh succesive month that house prices have fallen. Since November they have fallen at an annualised rate of 11.4% and 16.1% over the past three months.
Predictions about how far house prices will eventually fall vary wildly and the International Monetary Fund (IMF) has said that 30% of the rise in prices in the UK cannot be explained by economic fundamentals. There is now little doubt that the housing market bubble is in the process of deflating and the only question is by how much and how quickly. The impact of the collapse will be determined laregly by the speed of deflation. Too much all at once will be serious whereas a gentle 1% decline over 8 to 12 months will be much less drastic.
However, there is a strong correlation in the UK between house prices and consumer spending suggesting that the downturn will spread to the rest of the economy leading to a particularly hard time for retailers.
Many economic commentators will be waiting anxiously to see if June’s decline matches May's, which at 2.5% took most by surprise.
The recent fall in house prices should be good news for many would-be home owners who have been priced out of the market because take-home incomes are still rising, despite the economic slowdown, making house prices steadily more affordable but balanced against this lenders are also demanding much higher deposits than before as they seek to ration their lending.
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