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House prices fell by 1.3% in January as the deepening recession and turbulence on the financial markets continued to deter would-be buyers, the UK's biggest building society said today.
Nationwide's monthly snapshot of the housing market showed the average house price has fallen to £150,501 – down 16.6% or £30,000 since last January.
The monthly fall is much smaller than December's, when prices dropped by 2.5% over the month, and the three-month figures also recorded a smaller fall with prices down 4% as opposed to 4.2% last month.
However, Nationwide's senior economist, Martin Gahbauer, said it was too early to say this marked the start of sustained improvement in the market.
Despite swingeing interest rate cuts that have reduced the Bank of England base rate to its lowest ever level of 1.5%, and the injection of billions of pounds into the mortgage market, Gahbauer said buyers were likely to remain cautious.
"While the fall in house prices and the parallel reduction in interest rates has probably made many households curious about what is currently available in the market, many are likely to be hesitant to commit in a recessionary environment of rising unemployment and increasing uncertainty about future incomes," he said.
"The fact that house prices still remain high relative to earnings reinforces this more cautious approach among potential buyers."
A lack of available credit for potential buyers, consumer concern that the market still has further to fall and, more recently, rising concerns over job losses have all contributed to a slump in demand for homes, which has pushed prices down.
Nationwide's figures show prices have now fallen for 15 months running, and the average price of a property is £35,000 below its peak in October 2007.
Lack of mortgage lending
In November the number of mortgage approvals for house purchases fell to a record low of 27,000, and Nationwide said figures for some of December suggested there had only been a small increase in new loans since then.
"House purchase approvals have historically been a good lead indicator of house price movements, and we would not expect to see a stabilisation of property prices until approvals recover significantly from current levels," said Gahbauer.
He added that there was some evidence to suggest enquiries from new buyers were starting to pick up, but this had not yet translated to an increase in property sales.
"However, the increasing level of enquiries suggests that activity levels have a reasonable chance of recovering from their recent lows once an end to the recession is in sight and/or the recent government interventions lead to an improvement in the availability of credit," he said.
Howard Archer, chief UK economist at IHS Global Insight, said the housing market "seems set for another very difficult year", with rising unemployment and ongoing problems with affordability and credit offsetting the benefits of lower interest rates.
"Many buyers with small deposits still face mortgage rates of over 6%, if they can actually get a mortgage. Furthermore, even if government measures aimed at lifting mortgage lending increasingly work, it will clearly take time for confidence to improve and mortgage lending to pick up significantly," he said.
Archer said he expected the turmoil in the housing market to add to pressure on the Bank of England to cut interest rates again when they meet next week, predicting a 0.5 percentage point reduction in the base rate to just 1%.
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