By Claire West

The Nationwide Monthly House Price Index shows a continuing decline in UK house prices for October.

- House prices fell by 0.7% in October
- Three month rate of decline accelerates to 1.5%
- Further quantitative easing could boost the housing market

Commenting on the figures Martin Gahbauer, Nationwide's Chief Economist, said:

“October saw a continuation of the modest downward trend in house prices that began at the start of the summer. The average price of a typical UK property edged down by a seasonally adjusted 0.7% month-on-month in October.

The three month on three month rate of change — a smoother indicator of the recent price trend — fell to -1.5% in October from -1.0 % in September. This is the largest decline over three months since April 2009, but is still well below the 5-6% rates of decline on the three month measure seen during the second half of 2008.

The annual rate of change — which compares the current level of house prices against their level twelve months ago — declined from +3.1% in September to +1.4% in October. If the recent trend in house prices were to continue through November and December, the annual rate of house price inflation would drop to between 0% and -1% by the end of 2010. This would compare to a rate of +5.9% at the end of 2009."
Mr Gahbauer also commented on how any further quantitative easing might impact the housing market;
“The October minutes of the Monetary Policy Committee (MPC) meeting pointed to increased debate about whether or not it would be appropriate to initiate a second round of quantitative easing in the near future. Should the MPC decide to follow such a course of action, it is worth considering what impact it might have on housing market activity and prices.

“The first round of quantitative easing was initiated in March 2009, roughly coinciding with the trough in house prices following the severe downturn that began in late 2007.

Although quantitative easing was probably not as important a factor in the subsequent house price
rebound as the reduction in interest rates to near zero, it probably did play some role and there are a number of ways in which it could be expected to influence the property market.

“Firstly, quantitative easing has the effect of lowering the cost of government borrowing. Since the cost of fixed rate mortgages is closely linked to the interest rates on government bonds, the policy would contribute to lowering the cost of borrowing for homebuyers taking out new mortgages. The cost of 2-year fixed rate mortgages has in fact already come down noticeably over the last year, partly as a result of markets anticipating additional quantitative easing by the Bank of England.

“Secondly, quantitative easing is implemented by purchasing government bonds from investors with
newly created money. To the extent that this money is then reinvested in bank debt or mortgage-backed securities, it could have the effect of improving wholesale funding conditions for UK banks and making it easier to refinance the large amount of government backed funding expiring over the next several years.

“Finally, additional quantitative easing could have the impact of raising inflation expectations, which in turn could encourage investors to divert more money from cash holdings into property-related assets.

“The strength of these effects is very difficult to quantify, and it is impossible to say at this stage whether additional quantitative easing would fully offset the various headwinds currently facing the housing market, including the impact of the measures announced in the Comprehensive Spending Review. On balance, however, it is reasonable to expect that a resumption of quantitative easing would provide some offsetting support to the housing market.”