Anyone banking on a sudden decline in house prices will be disappointed by the latest data from the Nationwide.

The August house price index from the lender shows that the price of a typical house in the UK rose by 1.3% in August to £164,729.

Although this is 0.7% lower than the same time a year ago it does show that bricks and mortar are able to defy gravity in these economically worrying times

Robert Gardner, Nationwide’s Chief Economist, puts much of this down to the ‘surprising resilience evident in the UK labour market’.

That house prices are holding up may surprise people given that inflation is relatively high and wages are not keeping pace as well as the delicate nature of the economy.

House Price Index Graph

House Price Index Graph-click to expand

But this could be partially explained by some interesting comparisons between the mortgage market pre-credit crunch (2005-2007) and the present day that the Nationwide also included in its release:

  • Monthly mortgage approvals are less than half what they were in those heady days (107,700 then, 50,500 now).
  • First time buyer mortgage numbers have over halved from 32,400 a month to 16,700.
  • But the FTB share of the market has increased from 37% to 39%, which seems to differ from the overall perception we have. Especially as the FTB average deposit is now 20% as opposed to 10% pre-credit crunch. But FTB are taking out longer term mortgages now with the average being 28 years, which is up 3 years on 2005-2007.
  • The house price to earnings ratio has also improved by dropping from 6.06 to 5.11. But this is still worryingly high.
  • Interest payments have also fallen, with fixed rates down from 5.4% to 4.2% now and variable even more markedly down from 5.4% to 3.1%.
  • Affordability also looks to have improved for FTB, with a typical mortgage only taking 29% of take home pay now compared to 2005-2007 when it was a hefty 40%.

So fewer people are buying, but these buyers can afford the prices asked. They have the deposits to get good mortgage rates for lower LTV deals and have the wages that make their purchase affordable.

Couple this with there being few forced sales pushing prices down then you can see why house prices can remain stubbornly high. Then there’s all those government schemes that keep them elevated.

But if the labour market turns sour then all bets are off.

Melanie Bowler, UK Economist at Moody’s Analytics, commented:

A jump in house prices, according to Nationwide data out today, and a strengthening in mortgage lending, according to data out yesterday, is welcome news for the U.K. housing market. Property prices are down by about 13% from their 2007 peak and have generally been treading water since 2010.

A number of government and Bank of England backed schemes have been introduced in a bid to bolster the property market. The government hopes to bolster the market by allowing first-time buyers to put down 5% of the purchase price instead of the 30% or more required by lenders. Officials also plan to revive a “right-to-buy” plan for social housing tenants. Meanwhile, it is hoped the BoE’s “funding for lending scheme” will help revive mortgage lending which is at a tenth of its prerecession level.

However, weak economic conditions, including squeezed household finances and lingering job security concerns, suggest that a sustained recovery in the residential property market is still some way off. House prices are likely to move sideways through at least the rest of 2012. Furthermore, the government backed initiative is unlikely to be widespread enough to boost demand substantially; while the BoE scheme may actually bolster the buy-to-let market rather than help struggling first-time buyers.”

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