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Slowdown as new buyers fall away

Nationwide says affordability constraints, higher interest rates and lower house price expectations are more likely to affect UK property prices in the short term than the current market volatility.

The company says the rate of house price growth increased during August by 0.6 per cent but the annual rate fell to 9.6 per cent from 9.9 per cent in July.

But Nationwide still expects house price growth for 2007 to be around the middle of its forecast range of 5-8 per cent. It says slowing growth is primarily being driven by weaker affordability, the effect of higher interest rates and inflation on consumers’ pockets and lower house price expectations.

Chief economist Fionnuala Earley says: “It has taken some time for these factors to bite but there are now clearer signs of slower demand in the market reflected in the collapse in new buyer enquiries. In addition, the stock-to-sales ratio, which leads house price inflation by five to seven months, predicts a continued slowing in the annual rate of house price inflation.”

Earley considers that the overall extent of any damage to economic growth and the housing market will depend on the duration of the credit crunch. She says: “A prolonged financial market downturn would be uncomfortable for the overall economy given the importance of this sector to economic growth over several years.”

Earley says that the turmoil in credit markets will strengthen the case of the doves on the Bank of England monetary policy committee as it will be reluctant to do anything to add uncertainty while the markets remain volatile.

“The Bank of England’s reluctance to intervene in the markets in the same way as the Fed and the ECB suggests that at the moment it is fairly sanguine about the lasting effects of the credit crunch,” she adds.

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