Eye of the storm as prices recover but sales levels drag

House prices are back up to what they were this time a year ago, the Nationwide reported this morning.

But the lender warned that transaction levels are still around half of what they should be and remain a reason for caution. One estate agent's reaction to this morning's news was: "We are in the eye of the storm."

Martin Gahbauer, Nationwide’s chief economist, said: “Turnover in the market is still well below normal levels. The housing turnover rate – measuring the percentage of the private sector housing stock changing hands each year – fell to only 3% at the end of 2008.

“Although it has since recovered to nearly 4%, there is still quite some way to go before turnover reaches the pre-downturn level of between 7% and 8%. 

“Lead indicators, such as mortgage approvals for house purchase, suggest that turnover should continue edging higher over the next few months, but at the current rate of increase it would take another 18 months for it to reach pre-downturn levels.  

“There is usually a fairly strong correlation between housing turnover and house price inflation. Under normal circumstances, the current turnover rate would probably still be too low to be consistent with positive house price inflation. 

“However, during periods when only a small proportion of the housing stock is available for sale, even a relatively low turnover rate can be consistent with increasing house prices. There is widespread evidence that this has been the case so far this year, which explains much of the rebound in house prices since the February trough.”

Today, Nationwide reported that September house prices were up 0.9% from August to reach an average of £161,816 – the same as September last year, although still 13.5% down from the October peak.     

Gahbauer said the worst was probably over, but speaking on the BBC Today programme this morning, he would not rule out further price falls.

He said: “The most intense phase of the recession and financial crisis has probably passed. However, given that the housing market still faces considerable headwinds in the form of high unemployment, restrictive credit conditions and an impending withdrawal of the Stamp Duty holiday, it would be surprising to see house prices continuing to increase at the very strong rate seen in recent months. 

“One of the key questions facing the outlook for house prices is whether the supply of homes available for sale will remain at current lows.”

He also said that the high incidence of ‘accidental landlords’ in the rentals market was a unique factor that could complicate the future outlook for house prices.

Estate agent David Smith, senior partner at Carter Jonas, said: "We are in the eye of the storm. Yes, house prices are rising due to a combination of low supply and more positive news generally emerging from the economy, and yes, we are almost certainly past the worst, but we have to epect more turbulenc ahead as a result of rising unemployment and interest rates.

"This toxic combination will bringmore property on to the market as people struggle to meet their repayments, which will apply downward pressure on prices and potentially reverse the recent trend, at least for a time."