House Prices Look Surprisingly Strong

At least two recent house price surveys have suggested that the housing market is fragile, but today's figures from Nationwide are more positive. What's the true picture?

Today's house price figures from Nationwide Building Society are surprisingly positive. House prices rose 0.7% in September compared to a 0.6% gain in August. Economists surveyed by Bloomberg had only expected a 0.3% rise for this month.

So does this unexpectedly large rise mean I was wrong to say a month ago: `The housing boom is coming to an end'?

Well, although I'm surprised by today's numbers, I'm still fairly negative on the housing market. For starters, there have been two other recent surveys showing falls, including one from the Royal Institution of Chartered Surveyors (RICS).

What's more, some of the other figures in Nationwide's survey support a more negative view.  For example, the 3-month on 3-month rate of price growth slowed from 2% to 1.6%. This is the lowest quarterly increase since July 2006.

The credit crunch and the aftermath of the Northern Rock debacle are also starting to make an impact. Rates for some variable rate mortgages including trackers are on the up. And Nationwide says that the difference between interest rates for 95% loan-to-value mortgages and their 75% equivalent has grown.  On top of all that, the BBA (British Bankers' Association) said today that gross mortgage lending for August came in at £21bn, only 1% higher than August 2006.

Yes, I admit that a rise in the Bank of England's base rate looks less likely than it was six weeks ago. Some pundits are even predicting a base rate cut early next year. Following on from that, some lenders are cutting the rates on fixed-rate mortgages to reflect these expectations.

With lower fixed rates, it's possible that fewer borrowers will be hit by the much talked about "payment shock." In other words, when introductory mortgage deals expire over the next year or so, borrowers may have a decent chance of finding a replacement deal they can afford. That said, the best deals may not be on offer to as many borrowers as six months ago.

So, if you're optimistic about the housing market, there are some points in your favour. And nobody can ever make certain predictions on this, too many commentators have been made to look stupid in the past.

I also accept that property prices have consistently done well historically and I expect that long-term trend to continue. I'm not suggesting that Fools should all rush and sell their homes tomorrow.

That said, I am more negative over the short-term. My view is that house prices are at best set to plateau in 2008 and possibly fall. Note that shares in UK house builders are down some 40% this year.

I suspect that the problems associated with the credit crunch will persist for some time, and houses selling for large multiples of average earnings can't last forever.

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