Housing market may be cooling

House prices rose by just 0.2% in May and a likely jump in interest rates may lead to a further slowdown in the market, Nationwide building society said today.

Although the "sluggish" rise in prices this month was slightly up on the 0.1% increase in April, the society said it was significantly lower than March's 1.1% rise.

Prices have risen by an average of £20 a day for the past 12 months, and at £164,632 the average stands £7,500 higher than in May last year, but the annual rate of inflation has slowed to 4.7%.

Nationwide said the number of mortgages approved for house purchase remained historically high and that house builders and estate agents continued to report strong demand for homes.

However, the society's chief economist, Fionnuala Earley, said there were signs the market may be starting to cool. "Not all drivers are supportive of rising house price inflation," she said.

"Apart from well-known concerns about stretched affordability among first-time buyers, and the rising transactions costs that movers face, there are now further reasons to expect some cooling in the rate of house price inflation over coming months."

Chief among these, Ms Earley said, were expectations of an interest rate rise in the near future. This has already driven up the cost of fixed-rate mortgages and may be making borrowers nervous.

"Tracker mortgage rates tied to the base rate, by definition, remain unchanged, but additional talk of rate hikes is still likely to affect borrower sentiment, particularly when there are increasing reports of job losses and consumer confidence is fairly subdued," she said.

"The effects of hawkish interest rate expectations in the financial markets on fixed mortgage interest rates and press reports pointing towards the possibility of higher rates, should contribute to a cooling of house price growth."

Earlier this month, the Royal Institution of Chartered Surveyors said it expected prices to continue rising for some months.

It said it had seen an increase in the number of enquiries from potential buyers in April, while the number of available properties was down 10% on the same period last year.

Howard Archer, chief UK economist at consultancy Global Insight, said while Nationwide's figures suggested the housing market was losing momentum, it was "premature" to read too much into the data.

"House prices can be very volatile on a short-term basis," he said. "Indeed, it is still very possible that house prices could see further strength in the near term, given that mortgage activity and buyer interest is still relatively high, and there is a reported shortage of properties in some areas."

But Mr Archer added that the figures did support his belief that house prices would level off this year.

"Activity is likely to be pressurised by the significant overall firming in house prices in recent months, as well as by mounting buyer concerns that interest rates could start to rise sooner rather than later," he said.