House price growth slows 'as consumer prepare for cash squeeze'

House prices recorded their second consecutive monthly fall in April, while the annual rate of growth slowed to 2.6 per cent, the weakest since June 2013.

That’s the latest housing market data from the Nationwide, which says the recent softening in price growth may be an indication that households are starting to react to the emerging squeeze on real incomes and to affordability pressures in key parts of the country. 

Various data suggest that the latest slowdown in house prices may be part of a broader trend according to the Nationwide’s housing economist, Robert Gardner.

He points to retail sales growth slowing markedly in recent months from a 14-year high of 7.3 per cent in October to 1.7 per cent in March.

“Household budgets are coming under pressure, as wage growth has moderated and inflation has accelerated. The household saving ratio, which measures how much income goes unspent each quarter, fell to an all-time low of 3.3 per cent in Q4 2016 on data extending back to 1963.

“There may also be more fundamental reasons for the slowdown. House price growth has been outstripping earnings growth for a sustained period of time, steadily eroding affordability on a number of metrics. For example, the typical house price is currently 6.1 times average earnings, well above the long run average of 4.3 times earnings, and close to the all-time high of 6.4 times recorded in 2007.

“Moreover, even though mortgage interest rates have touched new lows in recent months, the cost of servicing a typical mortgage is only just in line with [the] long run average, and above long run averages in London and parts of the South of England” he adds.

Gardner continues: “Given the ongoing uncertainties around the UK’s future trading arrangements and the upcoming election, the economic outlook is unusually uncertain, and housing market trends will depend crucially on developments in the wider economy.

“Nevertheless, in our view, household spending is likely to slow in the quarters ahead (along with the wider economy) as rising inflation increases the squeeze on household budgets. This, together with mounting housing affordability pressures, is likely to exert a drag on activity and house price growth in the quarters ahead.”