More evidence of slowdown in house prices as market 'calms'

House prices rose slightly in September after two months of decline, but the annual rate of increase slowed down further from its spring peak, the Nationwide reported yesterday.

House prices rose slightly in September after two months of decline, but the annual rate of increase slowed down further from its spring peak, the Nationwide reported yesterday.

David Parry, planning director at the building society, said the housing market was returning to a "sensible" trend. He predicted the number of property sales would stay flat for the next few months, and said house price inflation would slow to 7 per cent by the end of this year.

This moderate rate, lower than the Nationwide's previous forecast, compares with an increase of 10.2 per cent in the year to September and a peak of 17.5 per cent in April. The average house price rose 0.4 per cent to £80,672 last month, similar to the April level after a series of small ups and downs during the summer.

Clear signs of a return to calmer conditions in the housing market will boost hopes that the Bank of England's Monetary Policy Committee will decide against any further interest rate increases. The committee, split 5-4 against a rise for the past two months, is due to announce its next decision on Thursday.

The reason for the cooling off seems to be a drop in the number of first-time buyers entering the market. Although monthly mortgage payments remain low by past standards, the very high absolute level of prices -- especially in London and the South East -- means many new buyer cannot easily afford the deposit.

The report said a buyer would need to earn £34,000 to afford a first-time property in London, up from £27,000 a year ago. It said few people were prepared to overstretch themselves with a 100 per cent mortgage, with memories of the negative equity trap after the late 1980s boom still very strong.