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House prices fell by 1.8% in February as sharp interest rate cuts and improved affordability failed to restore market confidence, the UK's biggest building society said today.
According to Nationwide's latest snapshot of the housing market, the average price of a UK home has fallen by 17.6% over the past 12 months, dropping by more than £31,000 to £147,746. Prices are now 20% down on their October 2007 peak of £186,044.
The society said that despite swingeing interest rate cuts, which have brought the Bank of England base rate down to 1%, its lowest ever level, would-be buyers were still holding back.
Nationwide's chief economist, Fionnuala Earley, said: "Early signs of increased interest in housing, as reported by the pick-up in new buyer enquiries, have yet to filter into sales, but do suggest that falling prices and interest rates are raising curiosity now, which could flow through quickly once confidence returns."
However, she added: "Further cuts in rates will be welcome in the housing market, but the economic conditions that require them will mean that there is unlikely to be a swift turnaround in the housing market in 2009."
Figures published this week by the British Bankers' Association showed an upturn in the number of mortgages approved for house purchases in January, and estate agents have been reporting an increase in interest from potential buyers.
Some will have been encouraged by recent price falls and falling interest rates, which have made homes much more affordable for first-time buyers. However, mortgages remain hard to come by and lenders are still offering their best deals to those with large deposits
Mortgage scarcity
According to Nationwide, at the end of 2007 a typical first-time buyer would have paid around £150,000 for a property, of which they would have borrowed 90% at a rate of around 6%, meaning monthly mortgage repayments of around £915.
Today they could buy a home for £125,000 on a mortgage of just £530 a month, but only if they were able to raise a deposit of 15% or £25,000.
Although Northern Rock this week announced plans to go back into the market with the offer of a 90% mortgage, these loans remain few and far between, and rates are higher than those on offer in 2007. A buyer with just 10% to put down would typically have to repay £748 a month, according to Nationwide's figures.
Earley said: "The significant reduction in price and the cost of mortgages may be two of the factors behind the rise in buyer enquiries reported by estate agents.
"But the fact that this has yet to feed into actual housing transactions means other factors are at play. For one, the ability to raise a larger deposit is acting as a constraint. In addition, consumers' expectations of house price growth are still falling and this is likely to dissuade many from moving just now."
Howard Archer, chief UK economist at his IHS Global Insight, said he expected house prices to fall by another 15% this year, with rising unemployment adding to the problems posed by the lack of available credit and falling consumer confidence.
"Even if the government's Northern Rock-led measures to lift mortgage lending increasingly take effect, it will still likely only result in a gradual pick up in mortgages," he said.
Despite the 1.8% fall reported by Nationwide, which follows a drop of 1.3% in January and a 2.6% fall in December, estate agents in some affluent areas of the country have been reporting a return of some practices last seen when the housing market was at its most buoyant.
Last month, following Halifax's report that prices had risen on its index, some agents in prime areas of London said they had witnessed examples of gazumping and buyers being outbid for homes.
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