New data from SmartNewHomes.com, the UK’s leading new homes website, confirms this year’s interest rate rises have taken effect on the new homes market, resulting in a significant slowdown in both activity and prices.

The SmartNewHomes index shows that the average price of a new property in July 2004 was £276,442, down 0.6% over the last month and only a 4.9% increase on the same time last year, compared to recent 12-monthly increases of over 6%.

Rate rises take effect

The figures demonstrate the effect the Bank of England’s actions had on the previously-strong housing market, with buyers scared off from entering the market by rising interest rates, said the firm.

Comments made earlier this year by Mervyn King, Governor of the Bank of England, in which he warned that high house price rises could not be sustained, have also taken effect as homebuyers sit tight and house builders are forced to set lower prices for properties.

Shortage of buyers pulling on prices

Recent reports claim that the number of buyers is decreasing. However those homebuyers that are still in the market are willing to pay higher prices for desirable properties. The index shows that the average price homebuyers are willing to pay for a new home in July 2004 was £220,427 - 6.1% more than 12 months ago.

However, house builders’ stock does not match the types of property in demand, hence the apparent contradiction of supply prices falling as demand prices rising. For example the cost of semi-detached homes has fallen as more become available but the demand for them stays the same.

London falling as North reaps rewards of affordability

July saw strong patterns of regional variations, with the still-affordable North (+5.9) and North West (+2.9%) seeing big rises over the last month, whilst the high prices in Greater London (-3.6%) and the South East (-0.9%) proved unsustainable.

The affordability of these regions, combined with the perennial search for a better quality of life, produced high migration rates out of the urban areas and into more rural parts of the country such as the South West, Wales and Yorkshire and Humberside.

Bank of England tightening the market

David Bexon, Chief Executive of SmartNewHomes, commented: “This month’s index clearly shows that the Bank of England’s tactics to slow down the market are working and taking effect on new homes as well as on the general housing market. Not only are we seeing falling prices, but homebuyers are running scared from the consistent rate rises and dropping out of the market."

“However we know the demand is still there for new homes which means that far from crashing into oblivion, the market in the next few months will remain steady and return to more sensible price levels.”