House prices increase for third consecutive month

Commenting on the figures Martin Gahbauer, Nationwide’s Chief Economist, said: "Even if prices were to remain unchanged for the rest of 2009, the year-on-year rate would continue to improve since prices were falling very sharply in the second half of last year.

"For the first seven months of 2009 as a whole, prices have risen by a cumulative 1.3%, suggesting there is now a reasonable chance that prices could end the year slightly higher than where they started.

"Only a few months ago, such an outcome would have appeared unthinkable."

He added: "House prices have been remarkably resilient so far this year, despite a recessionary economic background with
sharply rising unemployment. Although this outcome has come as a surprise, it is not inconsistent with other economic indicators and asset prices, which have also bounced back somewhat after very severe declines around the turn of the year. During turbulent economic times, it is not unusual for economic indicators and asset prices to overshoot in one direction and then experience a correction in the other.

"In the specific case of the housing market, the very sharp decline in transactions over the course of 2008 produced a fairly large pool of prospective purchasers who were ready and able to buy in principle, but did not want to do so in the very
uncertain conditions prevailing when the banking crisis was at its peak last autumn.

"When it became clear that government interventions around the globe had stabilised the banking system and prevented a worst-case economic outcome, some of this pent-up demand re-entered the market, with the added assistance of very low interest rates. Although the resulting rise in transactions has not been that dramatic, it has been enough to produce an upward bounce in prices because it coincided with very low levels of supply on the market."

But he warned: "The improvement in housing market conditions, however, does not mean that the positive price trends of recent
months can be extrapolated into the future in a straight line.

"If prices continue to increase at the rate of the last three months, they would soon rise to levels that would be noticeably out of line with earnings, rents and other fundamental determinants of housing valuations. One should also not underestimate the impact over time of high unemployment, which has implications both for buyer confidence and the financial pressure on existing owners to sell.

"It is unlikely, therefore, that price increases can be sustained for long at the very strong rate observed over the last few months."

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