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House prices record biggest fall in 3 years

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House prices showed the largest decline in three years as the UK economy dipped back into recession and household spending hit an all-time low.

According to the building society Nationwide, house prices declined by 0.6% in June, taking the annual pace of house price growth down to -1.5%, the lowest reading since August 2009.

Robert Gardner, chief economist at Nationwide said: “The slightly weaker trend we’ve observed since March is unsurprising, given the difficult economic backdrop, with the UK economy dipping back into recession at the start of the year and few signs of a nearterm rebound.

“Part of the weakness in house prices may also relate to the ending of the stamp duty holiday in March, which provided a temporary boost in early 2012, as buyers brought forward purchases that would otherwise have taken place later in the year.”

The outlook for the house prices remains uncertain for the upcoming 12 months, as economic conditions are not expected to improve any time soon.

Garner continued: “However, policymakers’ efforts to bolster the supply of credit to the economy and to help lower the cost should provide support to demand.

“Moreover, the supply side of the market is still constrained, with construction failing to keep pace with the number of new households being formed. Overall, this suggests a continuation of the pattern experienced over the past two years, with prices remaining fairly stable over the next twelve months.”

Nationwide also attributes the expiry of the Stamp Duty holiday for first time buyers towards the end of March in helping to create significant volatility in the lending market in recent months.

Mortgage lending to first time buyers in March totalled £3bn, around 40% above usual levels. Moreover, 63% of first time buyer purchases in March were between £125,000 and £250,000, compared with around 50% normally.

Garner said: “It’s not hard to understand why the effect on the timing of
transactions was so strong – bringing forward purchases offered substantial savings. We estimate that over 200,000 first time buyers benefited from the stamp duty holiday over the last two years, saving a total of nearly £375m – around £1,800 each.

“It is harder to assess the extent to which the stamp duty holiday generated “additional” first time buyer activity, i.e. purchases that would not otherwise have taken place. Similarly, it is hard to judge how much activity will be dampened by its re-imposition.”

This follows recent a recent report from the British Banker’s Association (BBA) that mortgage repayments outstripped lending for the first time in 16 years. This change in behaviour is said to have arisen as households are focusing on paying down their debts.

Net mortgage lending declined by £73m – also partly due to borrowers finding it harder to get mortgages in recent months, with lenders tightening their borrowing criteria and raising their rates in response to the weak economy and the on-going Eurozone crisis.

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