UK house price growth is slowing

UK house prices rose a modest 0.7% in July, confirming that house price inflation is slowing, according to Halifax...

House prices increased by 1.3% between April and July, according to Halifax’s monthly House Price Index.  This was the smallest three monthly rise – a good indicator of the underlying trend – since August 2006.  The three monthly growth rate has fallen sharply in recent months, dropping from a high of 4.5% in March.

Martin Ellis, Chief Economist at Halifax, commented: "House prices increased by 0.7 per cent in July.  This is the fourth consecutive month that house prices have risen by less than 1.0 per cent, confirming that house price inflation is slowing.”

Ellis continued: “We expect the downward trend in house price growth to continue as the five interest rate rises since last summer have an increasing impact on household spending and housing demand.   Sound economic fundamentals, high levels of employment and a shortage in the number of properties available for sale, particularly in London and the South East, will, however, continue to support house prices."

According to the Halifax report, the annual rate of house price inflation edged up in the past two months from 10.6% in May to 11.2% in July despite smaller monthly rises.  This increase in the annual rate is due to the weakness in house prices in mid 2006 when prices fell by 0.3% between April and July.  Halifax believes that this recent modest pick-up in the annual rate is likely to be short-lived as the impact of higher interest rates is increasingly felt over the remainder of the year.

Housing market activity also continues to ease

According to Bank of England data, mortgage approvals to fund house purchase in the three months to June (Q2) were 4% lower than in the preceding quarter. This continues the downward trend since last autumn with approvals in 2007 Q2 being 8% lower than in 2006 Q4.

Data from The Royal Institution of Chartered Surveyors (RICS) indicates that the level of new buyer interest in purchasing a house fell for the seventh successive month in June, suggesting that potential buyers have become more cautious.  Completed property sales also fell in 2007 Q2 and were 6% lower than a year ago.

Fixed rate mortgages delaying the cooling effect of higher interest rates

Halifax observes that the increase in the proportion of borrowers taking out a fixed rate mortgage in recent years appears to have affected the timing of the housing market's response to interest rate changes.  As a result, house price inflation and activity are likely to take longer to slow as interest rates rise because many borrowers are only affected when their fixed rate deal matures.  Over the past 18 months, nearly 70% of new mortgages have been taken out on fixed rate terms; substantially above the average of around 40% since 1993.

Homeowners who took out a fixed rate deals two years ago will face higher mortgage payments when they re-mortgage.  A borrower with a £114,000 mortgage, taking out a two year fix in 2005 at 5.08%, will face an increase in monthly payments of around £65, or 10%, when the deal expires this year.  However, Halifax expect that the overwhelming majority of these borrowers will be able to absorb the increase in payments, as earnings and housing equity have risen in the past two years.

Demand likely to fall but economic fundamentals remain sound

A healthy economy and a strong labour market continue to underpin housing demand, according to Halifax.  The UK economy recorded an unprecedented 60th consecutive quarter of rising activity in 2007 Q2.  Gross domestic product (GDP) increased by 0.8% between Q1 and Q2, above its long-term average pace (0.7%).  Over the 15 years from 1992 Q3 to 2007 Q2, the level of GDP in the UK increased by 53% after adjustment for inflation.  This is significantly faster than in the previous 15 years when the level of GDP increased by an inflation-adjusted 32%. 

The number of people in employment has also risen strongly in the past few years against this background of healthy economic growth.  According to the Office of National Statistics, employment continued to rise in the three months to May with the total number 180,000 higher than a year ago.  Halifax this sound economic back drop, together with an ongoing shortage of both new house building and secondhand properties for sale, should continue to bolster house prices against the negative effects of falling demand.

Halifax believe that pressure on householders' finances is likely to increasingly curb housing demand over the remainder of 2007. The increase in mortgage rates since last summer is having an effect on housing affordability and will bite further during the coming months.  Negative real earnings growth so far this year and rising food prices will also reduce the income households have available for housing, Halifax point out.

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