House price growth slows to 10-year low

The slowdown in the housing market broke through another landmark last month as annual price inflation plunged to its lowest level in almost a decade.

The slowdown in the housing market broke through another landmark last month as annual price inflation plunged to its lowest level in almost a decade.

Nationwide building society said yesterday the annual rate of house price growth fell to 5.5 per cent in May, the lowest level since August 1996.

This marked the point in the Nineties at which the property market made a decisive break from the previous five years of price falls and stagnation to embark on its recent boom.

May's figure compared with the 7 per cent recorded in April and was just one-third of the pace of the recent peak of 20.3 per cent recorded in July last year.

Nationwide said it was further evidence of a "slowing trend" in the housing market, adding that it cemented its forecast of a soft landing rather than a crash in price. "Employment, income, interest rates and confidence are still supportive," Fionnuala Earley, Nationwide's group economist, said. "This does not suggest that the market will pick up again rapidly; rather that it will continue on its gently cooling path this year."

However she highlighted a range of risks such as the high levels of debt, the impact of recent interest rate rises, fear of future of tax increases and a slowdown in the wider global economy. She said London and the South-east had already seen localised falls in prices and warned that other parts of the country could see values drop.

Nationwide said prices had increased by an average of just 0.2 per cent in the past three months compared with an average 1.7 per cent for the same period last year. Figures from the Bank of England on Wednesday pointed to a signs of a gentle rebound as mortgage approvals - an indicator of future price growth - rose to a nine-month high of 95,000.

Howard Archer, economist at Global Insight, said: "While latest data and survey evidence relating to housing market activity show overall signs of stabilisation at a relatively low level, it currently remains largely a buyers' market. There seems little likelihood of a sharp correction occurring in house prices over the coming months, unless the economy slows markedly and unemployment starts to rise significantly."

Other economists are still worried about the risk of a renewed downturn in the housing market. Capital Economics, a consultancy that forecasts a 20 per cent price fall over the next three years, said property was still overvalued. Ed Stansfield, its property economist, said: "With tax rises in the pipeline and mortgage demand remaining subdued, it seems probable that we are still only in the early stages of a protracted housing market correction."

The Bank of England is assuming in its forecasts that house price inflation will fall to somewhere close to zero. But Mr Stansfield said: "The common assumption that it has a natural floor at zero may need to be revised." The construction sector grew at its slowest pace in three and a half years last month thanks in part to stagnation in the housebuilding industry, the Chartered Institute of Purchasing and Supply said.

A separate survey of new loan enquiries at HSBC bank branches showed demand in the past three months had remained stable. It said demand in the three months to May grew by 2.2 per cent, down from 4.3 per cent in April but well ahead of the falls of more than 3 per cent at the turn of the year. John Butler, HSBC's UK economist said: "While the rate of take up of debt is easing, it remains relatively robust and an imminent rate cut would run the risk of encouraging households into even greater debt."