Key Points
The house price increase follows successive declines in May and June. This mixed pattern of monthly price rises and falls is a typical feature of a more stable housing market.
Technical factors – the corresponding monthly figures last year were weak – have, as expected, contributed to a pick-up in annual house price inflation in 2006. Additionally, the strengthening UK economy and improved buyer confidence gave the housing market more momentum than we expected in the first half of 2006. Halifax has slightly increased their forecast for house price growth this year from 3 per cent to 5 per cent. This forecast (5 per cent) is below the long-term average of 8 per cent but is in line with the reported increase in 2005.
Sound fundamentals, underpinned by a strengthening economy, high employment levels and low interest rates, will continue to support housing demand in the second half of 2006. The annual rate of house price inflation, however, is expected to ease, partly because the corresponding figures last year were strong. Pressure on householders' finances from utility bill and council tax rises, and speculation of higher interest rates, are also likely to moderate demand, causing house price inflation to decline.
Activity has stabilised in recent months with the number of loans approved for house purchase down 2 per cent in 2006 Q2 compared with Q1, on a seasonally adjusted basis, according to the latest Bank of England figures.
Martin Ellis, chief economist, said: "House prices increased by 0.2 per cent in July following successive declines in May and June. This mixed pattern of monthly price rises and falls is a typical feature of a more stable housing market. Overall, house prices have increased by only 0.9 per cent in the past four months compared with a 3.3 per cent rise in the preceding four months.
"Sound fundamentals will continue to support a healthy housing market over the remainder of 2006. Nonetheless, we expect the annual rate of house price inflation to ease, partly because the corresponding figures last year were strong. Increased pressure on householders' finances and mounting speculation of interest rate rises are also likely to curb demand."
A strengthening economy, high levels of employment – currently 223,000 higher than a year ago - and low interest rates will continue to support housing demand over the remainder of 2006, ensuring that the market remains in good health.
The Office of National Statistics' (ONS) preliminary estimate of gross domestic product (GDP) growth in 2006 Q2 demonstrates the improvement in the economy. GDP recorded a quarterly rise of 0.8 per cent in Q2, above the UK's long-term historical average of 0.6 per cent, and the strongest gain since 2004 Q2.
There are, however, increasing signs that both the upward trends in prices and activity levels are easing. House prices have increased by only 0.9 per cent in the past four months compared with a 3.3 per cent rise in the preceding four months. Activity has also stabilised with the number of loans approved for house purchase down 2 per cent in 2006 Q2 compared with Q1, on a seasonally adjusted basis, according to the latest Bank of England figures.
A continuation of these developments, together with the much stronger pattern of house price growth in the second half of 2005 compared with the first half, should mean that annual house price growth falls during 2006 H2.
Constraints will curb housing demand ……
Substantial increases in utility bills and above inflation council tax rises are putting pressure on householders' finances with the majority of the impact of these increases yet to be felt. British Gas's announcement of a further 12.4 per cent increase in gas bills last week following a 22 per cent rise in March underlines these pressures.
The upward movement in the pricing of fixed rate mortgages in the past few months and mounting speculation of higher interest rates are also likely to constrain demand in the coming months. Additionally, the ongoing historically high level of house prices relative to average earnings will curb demand. These factors are expected to constrain housing demand and, therefore, reduce house price inflation over the remainder of 2006.
Mortgage market has increased in size this year.
There has been a significant strengthening in the mortgage market in 2006, largely driven by the improvement in the housing market which has boosted lending to finance house purchase. The number of remortgage loans has fallen as a proportion of gross mortgage lending from 44 per cent in the first five months of 2005 to 38 per cent in the same period this year.
Gross lending is predicted to total a record £338 billion this year compared with £288 billion in 2005. Net lending is expected to increase from £91 billion in 2005 to £109 billion in 2006.
