Biggest house-price leap in four years sparks affordability worry

Nationwide warns affordability may become 'stretched' if demand continues to outstrip supply

The sharpest monthly rise in house prices for more than four years prompted warnings of property prices heading out of the reach of thousands of would-be buyers on Friday, as new figures showed a fresh surge in lending from banks and building societies.

Nationwide, the UK’s biggest building society, reported a 1.4 per cent jump in average house prices to £175,826 in December – the biggest rise in a single month since August 2009. This leaves prices 8.4 per cent ahead of a year earlier after 12 months in which the Bank of England’s Funding for Lending scheme and then the Coalition’s Help to Buy initiative have transformed the mortgage lending market.

Mortgage affordability is close to the long-term average – supported by record low interest rates of 0.5 per cent – with households spending around 29 per cent of their income on repayments. But the supply of new homes has not kept pace with demand following the recent upturn in lending, building pressure on house prices and the ability of homeowners to make repayments as wage growth remains far more sluggish, according to the Nationwide’s chief economist, Robert Gardner.

He said the supply of new homes “remains constrained”, adding: “The risk is that if demand continues to run ahead of supply in the quarters ahead, affordability may become stretched.”

While overall UK prices are still 5 per cent below their 2007 market peak, average prices in London now stand at £345,186 after a 14.9 per cent rise in the past year. This puts property in the capital 14 per cent above the 2007 peak, supported by a shortage of homes, queues of foreign investors and a stronger economy than the country at large.

The latest Bank of England figures showed mortgage approvals jumped 4 per cent to 70,758 in November –  above 70,000 for the first time since January 2008 and contrasting with falling business credit during the month. In November, Bank Governor Mark Carney acted to stem the flow of cash into the housing market by closing the FLS,  which allows banks to access cheap funding from the central bank, to mortgage lending and instead refocusing the scheme on business loans.

The mortgage lending surge has helped kick-start activity in the construction industry, which is in the midst of its longest hiring spree since 2008 according to the Chartered Institute of Purchasing & Supply. Cips’ December snapshot of industry activity, where a score over 50 signifies expansion, remained close to record levels, easing slightly from 62.6 to 62.1 in the month.

Construction firms have taken on staff for seven months in a row, the longest consecutive period of job creation for five-and-a-half years, as more confident clients give the go-ahead to projects. Commercial building saw the strongest growth in December, even outstripping housebuilding.

The survey from a sector that accounts for 6 per cent of the overall UK economy follows a strong December for manufacturers, raising hopes the UK can post growth in the final quarter  at least as strong as the 0.8 per cent between July and September. Tim Moore, Markit senior economist, said the industry’s revival “should keep staffing levels moving strongly upwards” during 2014.

David Tinsley, BNP Paribas UK economist, added: “Overall, the picture from the data remains consistent with a UK recovery that has been fairly household-led. The housing market is recovering strongly and this has seen some useful rise in construction activity too. And this construction uptick is spreading beyond just housing, which is encouraging.”