House prices continue to grow with UK economy 'performing relatively strongly'

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House price growth accelerated in February, with the average property value standing 4.5% higher than a year ago, according to an index.

A 0.6% month-on-month price increase in February took the average UK property value to £205,846, Nationwide Building Society said.

In January, annual house price growth had stood at 4.3% and house prices had increased by 0.2% month-on-month.

Robert Gardner, Nationwide's chief economist, said a small rise in house prices of around 2% is more likely than a decline over the course of 2017, as low mortgage rates and a dearth of homes on the market continues to support prices. 

He said: "Recent data suggests that the UK economy has continued to perform relatively strongly."

Mr Gardner continued: "The outlook is uncertain, but we, along with most other forecasters, expect the UK economy to slow through 2017 as heightened uncertainty weighs on business investment and hiring.

"Consumer spending, a key engine of growth in recent quarters, is also likely to be impacted by rising inflation in the months ahead as a result of the weaker pound."

Mr Gardner also said cash buyers are a more important driver of the housing market than they were a decade ago.

He said the share of cash transactions has increased significantly, from around 20% in 2005-6 to around 35% in 2008, remaining fairly constant since then.

Mr Gardner said: "The sharp increase in the share of cash purchases in 2007 and 2008 was a function of mortgage transactions declining sharply, rather than the amount of cash transactions increasing.

"This reflects the impact of adverse labour market conditions and the tightening of credit conditions during the financial crisis, which limited the number of people able to buy with a mortgage, while fewer such constraints would have applied to cash purchasers.

"However, it is interesting that the share of cash transactions has not fallen back as the economy has recovered.

"Part of the reason is that mortgage market activity has increased only modestly and remains some way below the levels recorded in the mid-2000s."

Mr Gardner said cash sales rose to a peak of 38.9% of transactions in the first quarter of 2016, as buy-to-let investors rushed to beat a stamp duty hike imposed last April. 

The ageing population is also prompting more cash sales, he said, with people who are downsizing for example being more likely to buy their new home in cash, having paid off their mortgage years ago.

In London, the share of cash purchases tends to be lower than the UK generally, with house prices in the capital being more than double the UK average, he said.

Howard Archer, an economist at IHS Markit, said: "Housing market activity is likely to be limited in 2017 by softer consumer confidence and reduced willingness to engage in major transactions."

He expects house price gains over 2017 to be limited to 3%.

Jonathan Harris, director of mortgage broker Anderson Harris, said: "While the proportion of cash buyers may be higher than it was a decade ago, the vast majority of people still need a mortgage and are taking advantage of the fact that rates are so low.

"What's more, lenders seem keen to lend and that competition should lead to the continuation of cheap rates through the spring."