House price growth still slowing, says Nationwide

The year-on-year rise in house prices fell to its lowest rate since May 1986 in August, but first-time buyers now need to find a deposit of £17,000, according to figures published today.

Nationwide building society said prices were down 0.2% over the month, reducing annual price inflation to 2.3%. This is compared to annual growth of 2.6% in July and 18.9% in August last year.

August's price fall reversed July's increase and continued the slowdown that has been ongoing since the beginning of 2005. The average house price now stands at £157,310, according to Nationwide.

However, life is still tough for first-time buyers. The lender said the house price to earnings ratio is now higher than at its last peak in 1989, with the average first-time buyer now forced to raise a deposit of almost £17,000. This is more than 50% higher than the average deposit needed in 2003.

The average first-time buyer's deposit now accounts for 62% of their gross annual earnings, compared to 20% in 1989, but this also reflects the fact that people are borrowing a smaller proportion of the price of their new home than they did 16 years ago.

And while raising funds to buy a property is a struggle, repaying the mortgage is easier for today's first-time buyers than those in 1989, said Nationwide's group economist, Fionnuala Earley.

"Such comparisons of affordability between these two high points in the cycle at first seem startling. But on the other hand, given that nominal interest rates are significantly lower, the debt burden is not as fierce.

"Mortgage payments account for 31% of take-home pay now, compared to 35% then. In cash terms the average first-time buyer now pays £518 per month, compared to £261 then. In today's money this equates to £436 - about 20% less in real terms than now."

Ms Earley added that while average first-time buyer house prices have increased by 161% over the past 16 years, the average mortgage size is up 138%.

Looking forward, Ms Earley predicted a continued cooling of the housing market and said it could be some time before a return to the price growth seen in the last two years.

While low rates meant borrowers could afford to service large mortgages, low inflation meant the real value of debt would take longer to erode.

"We can therefore expect a sustained period of unexciting movements in house prices before consumers' financial balance sheets are restored to more comfortable levels," she said.

Halifax is due to publish its latest house price index next week.