Tuesday, 20 May 2008Halifax April House Price Index
• House prices fell by 1.3% in April. Prices were 0.9% lower on an annual basis.
• We expect a mid single digit percentage decline in UK house prices this year. There will be regional variations, however. Some areas of the country, such as Scotland, are likely to record modest price rises whilst other parts (e.g. Wales and West Midlands) are expected to see falls above the national average.
• Price falls should be viewed in the context of the substantial price rises over recent years. UK prices nearly trebled (190%) over the ten years to August 2007. The average UK price rose by more than £130,000 between August 1997 and August 2007.
• The decline in prices is driven by a squeeze on spending power and the rapid rise in house prices in the last few years. These factors have curbed housing demand. The rise in interest rates between August 2006 and July 2007 has increased average mortgage costs. A decline in 'real' earnings over the past year has also constrained housing demand.
• A growing - albeit slowing - economy, high employment levels, low interest rates and a shortage of new homes underpin housing valuations. The economy grew at an annual rate of 2.5% in 2008 Q1; in line with the long-term average. Employment increased by 152,000 in the three months to February compared with the preceding quarter and stands at a record high 29.5 million.
• More Bank of England interest rate cuts are expected over the coming months as signs of the expected economic slowdown accumulate. This evidence will help to allay the MPC's concerns regarding inflation over the medium term, providing scope to reduce rates.
• This month we look at housing transaction levels as part of our occasional series on key market developments. Transaction levels in recent years – averaging 1.16 million a year during 2005-2007 – have been much lower than during previous cycles (1.7 million in 1988).
Commenting, Martin Ellis, chief economist, said:
"House prices fell by 1.3% in April. We expect a mid single digit percentage decline in UK house prices this year. There will be regional variations, however. Some areas of the country are likely to record modest price rises whilst other parts are expected to see falls above the national average.
Price falls should be viewed in the context of the substantial price rises over recent years. UK prices nearly trebled 190% over the ten years to August 2007. A growing economy, high employment levels, low interest rates and a shortage of new homes underpin housing valuations."
Pressures on householders' income curb housing demand
The decline in prices is driven by a squeeze on spending power and the rapid rise in house prices in the last few years. These factors have curbed housing demand. The rise in interest rates between August 2006 and July 2007 has increased average mortgage costs.
There has been a modest decline in 'real' earnings over the past year. Average earnings rose by 3.7% in the year to February, below the 4.1% increase in the headline rate of retail price inflation over the same period. Sharp increases in both fuel (4%) and food prices (6%) over the past year have helped to reduce the discretionary income available to households to fund house purchase.
Housing market activity is significantly lower than a year ago
Completed property sales in March were down 20% on an annual basis. The number of new buyers interested in home purchase fell for the sixteenth successive month in March, highlighting the decline in housing demand. (Source: RICS)
The number of mortgages approved to finance house purchase – a good leading indicator of house sales – in Q1 2008 was 41% lower than a year earlier.
High employment and low interest rates support house prices
A growing economy, high employment levels, low interest rates and a shortage of new homes underpin housing valuations. The economy expanded at an annual rate of 2.5% in 2008 Q1; in line with the UK's long-term average. The quarterly rate of growth, however, did slow from 0.6% in 2007 Q4 to 0.4% in 2008 Q1.
Employment increased by 152,000 in the three months to February compared with the preceding quarter and was 456,000 higher than a year earlier. The total number of people in employment stands at a record high 29.5 million.
The UK economy is forecast to slow during the course of 2008, recording below trend growth for the first time since 2005. We expect there to be a modest rise in unemployment later in the year due to this easing in growth. The scale of the increase in unemployment is unlikely to cause widespread difficulties for households.
MPC to lower rates further during the next few months
More Bank of England interest rate cuts are expected over the coming months as concrete evidence of an economic slowdown accumulates. This evidence will help to allay the MPC's concerns regarding inflation over the medium term, providing scope to lower rates. The MPC is nonetheless expected to maintain a "gradualist" monetary policy stance, lowering rates at a steady pace.
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