Robert Gardner, Nationwide's Chief Economist, said:
“UK house prices declined by 0.6% in August, although this doesn’t change the picture of relative stability that has characterised the market over the past twelve months. Indeed, prices were broadly unchanged compared with August 2010 – just 0.4% lower.
“Sluggish demand for homes, combined with only a gradual rise in the supply of available properties, has helped to keep property prices stable since last summer. We expect this trend to be maintained over the remainder of 2011, although downside risks have increased as UK and global growth prospects have weakened.
Economic conomic outlook has become more challenging
“The UK economy grew by just 0.2% in the second quarter of the year – well below its long-term trend rate of around 0.7%. Indeed, despite being more than eighteen months into the recovery, UK activity is still around 4% below where it was at the end of 2007.
“The Office for National Statistics suggests that at least some of the weakness in Q2 was the result of a number of one-off factors – including the Japanese earthquake (which disrupted manufacturing supply chains) and an extra bank holiday with the Royal Wedding.
"However, more recent data provide little evidence of a rebound, with surveys of business activity in the manufacturing and service sectors still implying only modest growth in the months ahead.
“Moreover, signs that the US recovery may be running out of steam and ongoing problems in the Eurozone are a particular concern for UK growth prospects at present.
“Exports are expected to be the main engine of UK growth over the next two years, since consumer spending is under severe pressure from a combination of high unemployment, sluggish wage growth and elevated inflation, while public spending is being held back by austerity measures.
"Clearly, this will be hard to achieve without robust growth in our core export markets in Europe and North America, which together account for well over half of our international trade.
Labour market developments key for housing
“The major risk for the housing market is that weak economic growth could lead to a further deterioration in the labour market.
“UK firms laid off far fewer workers in the wake of the 2008 recession than in previous downturns, even though it was one of the deepest and longest recessions on record.
"This was partly due to greater flexibility in the UK labour market, which held back wage growth, and allowed for reduced hours and a shift toward part-time and temporary workers, cushioning employment from the impact of weaker demand.
“Nevertheless, UK firms’ productivity (the amount of output per worker) has stagnated – a pattern which, if sustained, threatens to undermine firms’ profitability. The risk is that this time around, faced with a further deterioration in demand for their products, firms may react by laying off more workers.
“For some time now the residential property market has been moving sideways, as weak demand for homes coexisted with a situation where relatively few homes were coming on to the market.
"A further fall in employment would be likely to upset the relatively delicate demand-supply balance and put downward pressure on prices.
Stability still expected, but risks have increased
“We continue to expect the UK economic recovery to gradually get back on track in the quarters ahead, which should guard against a significant deterioration in employment.
“Policymakers have recognised the growing threat to UK growth and, as a result, interest rates are now expected to remain on hold until well into 2012, which will provide ongoing support for domestic spending. This is a significant shift from just a few months ago, when financial markets pointed to rates rising before the end of the summer.
“Against this backdrop we continue to expect house prices to move sideways, or drift modestly lower over the remainder of 2011, although we recognise that the downside risks have increased.”
Matt Hutchinson, director, flat and house share website Spareroom.co.uk, comments:
"August more than cancels out July but overall the picture remains the same: mildly fickle but ultimately flat. Buyers seemingly have little appetite to purchase unless they find sellers willing or able to drop their prices.
"The problem is many sellers simply aren't in a position to drop their prices, so we enter the limbo we're currently in. Nationwide are right to single out the now deep correlation between the fortunes of the economy and those of the property market.
"And with Europe and the US, our two main export markets, in disarray, this doesn't bode well for house prices moving forward.
"Nationwide talks about sluggish demand for homes and this sluggishness is creating a tremendous build up of pressure in the rental market as people delay buying their first property or make the decision not to buy at all.
"Rental demand is at record levels and rental prices are rising unabated, as letting agents can't take on new rental stock quick enough to meet this demand.
"If longer term property rental is going to be the norm, somehow the issue of maintaining adequate levels of supply will need to be addressed.
"What we could be seeing is a whole generation of young couples missing out on the opportunity to own a home, and this shift away from property ownership is causing havoc in the rental market."
Paul Hunt, managing director of Phoebus Software said:
“A drop in prices in August of 0.6% looks pretty dramatic on paper, but the subdued state of the mortgage market makes it difficult to draw firm conclusions from Nationwide’s data at the moment.
"With 9% of market share, Nationwide’s sample size is currently only 4,000, which partly explains the volatility of their numbers. What’s more, areas where house price growth is currently fastest are being driven primarily by cash buyers, which don’t factor into Nationwide’s numbers.
"The reality is probably less gloomy than these figures suggest. The improving affordability of finance will improve lenders’ confidence in the UK’s mortgage borrowers, which should stimulate more lending as the year goes on."
