Key Points
- House prices increased by 1.6% in August following a 0.4% gain in July. This was the biggest monthly gain since September 2004. Prices have increased by only 2.1% in the first eight months of this year compared with a 12.5% rise in the same period of 2004.
- On an annual basis, house prices were 2.5% higher in August, marking a significant downward trend in underlying house price inflation over the past year from an annual rate of 21.3% in August 2004.
- Market activity is improving somewhat. The number of mortgage approvals to fund house purchase continued its upward trend in July, according to the latest Bank of England figures, with the number of loans 26% higher than in November 2004 on a seasonally adjusted basis. Completed sales rose in July following four months of stagnation and there was an increase in new buyer enquiries for the second consecutive month, according to RICS.
- The pick-up in monthly house price growth in August seems to be consistent with a pattern established when the Bank of England implemented the first interest rate reductions during the two previous periods of rate cuts since 1997. On both occasions, there was an up-tick in house prices in the month that the interest rate cut occurred; this proved to be a temporary phenomenon.
- The economic fundamentals are good. The UK economy continues to grow, average earnings growth (4.2%) is outpacing consumer price inflation (2.3%) and employment during April-June 2005 was 216,000 higher than a year earlier.
- Halifax expect house price growth and activity levels to remain broadly stable over the remainder of 2005. The easing in economic growth over the past year, together with a ratio of house price to average earnings that remains historically high, is expected to curb housing demand and therefore prevent a renewed surge in house prices.
Commenting, Martin Ellis, chief economist, said:
"House prices increased by 1.6% in August following a 0.4% gain in July. This pick-up in monthly house price inflation is consistent with the continuing upward trend in market activity in recent months and the previous pattern of house price movements when the Bank of England begins to reduce interest rates.
Despite August's rise, house prices remain only 2.5% higher on an annual basis, marking a significant downward trend in underlying house price inflation over the past year with the annual rate at 21.3% in August 2004. Prices have increased by 2.1% in the first eight months of this year compared with a 12.5% rise in the same period of 2004.
The ongoing growth of the UK economy, robust earnings growth and historically high levels of employment all underpin the housing market. The slowdown in economic growth in 2005 and the high level of house prices in relation to average earnings will, however, continue to curb housing demand and should prevent a renewed surge in house prices."
The number of mortgage approvals to fund house purchase continued its upward trend in July, according to the latest Bank of England figures. The number of loans, at 97,000, was 26% higher than the low of 77,000 in November 2004, on a seasonally adjusted basis.
The most recent monthly report from RICS also provided evidence of an up-tick in activity. There was a rise in completed sales in July following four months of stagnation and new buyer enquiries rose for the second consecutive month.
The pick-up in monthly house price growth in August seems to be consistent with a pattern established when the Bank of England implemented the first interest rate reductions during the two previous periods of rate cuts since 1997. On both occasions, there was an up-tick in house prices in the month that the interest rate cut occurred; this proved to be a temporary phenomenon:
- In October 1998, house prices increased by 1.1% following a 0.4% rise in the previous month (September 1998)
- In February 2001, house prices rose by 1.6% following a 0.3% increase in the previous month (January 2001).
The UK economy continues to grow with an increase in GDP of 0.5% in the second quarter of 2005. Average earnings growth (4.2%) is outpacing consumer price inflation (2.3%) by a comfortable margin, according to the latest ONS figures. Employment also remains at historically high levels with 28.592 million in employment during April-June 2005, 216,000 higher than a year earlier. These factors are all supporting housing demand.
The easing in economic growth over the past year to a level that is currently below the UK's long-term average rate of growth, together with a ratio of house price to average earnings that remains historically high (at 5.46) despite a decline over the past few months, is expected to curb housing demand and therefore prevent a renewed surge in house prices. Overall, we expect both house price growth and activity levels to be broadly stable over the remainder of 2005.
