Nationwide House Price Index and House Prices Generally

Written on 5 December 2023 by Ray Boulger

Nationwide House Price Index and House Prices Generally

Nationwide's November house price index press release quotes prices in November as increasing by 0.2% but this misleading figure is only after the seasonal adjustment manipulation. The real figure, also quoted in the press release, was a fall of 0.3% on the month. The year-on-year figure is minus 2.0%.

The index shows the real average price in November at £258,557, lower than the August figure of £259,153, which makes a mockery of some comments referring to prices increasing for 3 months in a row, based on simplistically looking at only the manipulated figures, without mentioning what figures are being used!

Real prices fell by 0.65% in December 2022 and so unless prices fall by more than this in December, the annual 2023 figure will show a price reduction of less than 2.0%. Whether the year end figure is slightly above or below 2% values have held up better than I expected, which leads to some caution in trying to gauge what will happen in 2024.

Price movements in 2023 were remarkably small. The closing December 2022 figure was £262,068, a fall of 4.3% from the August 2022 peak. Prices fell a little further during the next 3 months, bottoming out in March 2023 at £257,122, resulting in a peak to trough fall so far of 6.0% (August 2022 - March 2023).

Most of this decline took place in the last 5 months of 2022, but due to a strong market in the first half of the year prices still closed 2.8% higher on the year. Therefore anyone just looking at calendar year price changes won’t see the full picture.

Apart from the strength of the market in 2023 (in values, not transaction numbers) another surprising factor is how narrow the price movements have been - less than 2% from the highest to lowest month so far, with only one month to go.

The November figure of £258,557 is only 0.6% above the March 2023 low point and so as I expect further modest price falls over the next few months the peak to trough figure is likely to increase.

One factor helping to maintain prices in 2023 was the large reduction in new home completions as developers slashed starts after the chaos caused by the Truss/Kwarteng mini budget. Starts recovered strongly from Q2 2023 and so new home completions in 2024 should be significantly above this year’s depressed levels.

Although the cost of fixed rate mortgages will decline further during 2024 those moving home will still have to accept a much higher mortgage rate than they are likely to be paying on their current mortgage, with the extra cost only partly offset by higher incomes. Trading up will therefore continue to present an affordability challenge for many movers in 2024.

In practice affordability comes in 2 guises - the maximum mortgage a borrower considers affordable is often higher than lenders’ figures and at the moment this is a bigger challenge than usual. The reason is that we are finding 2 year fixed rates are currently the most popular mortgage choice, which means that to comply with FCA rules lenders have to stress test the maximum loan at not less than their revert to rate, normally the SVR, plus 1%. Most major lenders’ SVRs start with an 8 and so they must stress test at over 9%.

Although borrowers preferring a 2 year fix but constrained by lenders’ high SVRs can avoid this problem by choosing a fixed rate for 5 years or longer (the regulatory stress test linked to SVR does not apply to fixed rates of 5 years or longer) lenders could mitigate the problem by bringing the spread between Bank Rate and SVR back to around the 2% level which was normal until 2007. As few borrowers actually pay SVR for long, if at all, by far the biggest impact of this particular mortgage rate is its role in determining the maximum loan available, rather than as an income generator for lenders.

This issue highlights the question of whether an interest rate few people pay is still relevant in today’s market as the right reference rate for assessing maximum borrowing!

Categories:Property Market, Ray Boulger