British house price inflation looks set to slow sharply next year as affordability constraints are compounded by tighter lending conditions, according to Nationwide, Britain's biggest building society.
A reluctance to extend credit has sent funding costs on money markets rocketing in recent days, putting pressure on lenders to pass these costs on, Nationwide Chief Economist Fionnuala Earley told Reuters.
"If this situation persists, those lenders most dependent on wholesale markets for funding and those with the riskiest books will be forced to pass on higher costs, making it harder for people to get loans," she said. "We expect house price inflation to be no higher than wage inflation next year, so we are talking about low single digits."
Wage inflation in Britain currently stands at 3.3 percent, its lowest level in four years. Despite a series of interest rate rises from the Bank of England, annual house price inflation in Britain is still running close to 10 percent, but Nation-wide expects it to slow to around 6 percent by December. Should it slow to 3 percent next year, it would be the weakest annual average rate of growth in more than a decade.
London's reliance on the financial services industry means prices there could be at particular risk if the credit squeeze continues, said Nation-wide, Britain's third-biggest mortgage provider. Strong merger and acquisition activity fuelled a bonus bonanza for City bankers, traders and lawyers this year, sending house prices in London's ritzier neighbourhoods soaring.
The end of cheap credit means this is unlikely to be replicated. "Until trading floors return to full strength in September we are still in a wait-and-see situation but it seems unlikely that City bonuses will be as big as last time," said Earley. Nation-wide will release formal forecasts for 2008 house price inflation later this year.
The mortgage lender says the chance of a full-blown house price crash is low as long as employment levels remain high and the supply of new homes limited. It is, however, keeping a close eye on the credit markets. "If the wheels stop turning in the credit markets, that has repercussions for the broader economy at a time when housing affordability is already stretched," said Earley.