Key points:
- House prices fell by 0.6% in May. However, UK house prices are broadly unchanged so far in 2005 with a decline of 0.1% in the first five months of the year.
- The annual rate of house price inflation fell to 5.7% in May, continuing the downward trend from the peak of 22.1% in July 2004. The current pace of growth is the lowest in four years.
- Some monthly rises this year have been followed by subsequent monthly falls in house prices. The market is operating within a narrow band of price volatility and is flat overall. Prices have risen in three out of the past six months and fallen in another three months.
- Estate agents have reported broad stability in market activity in recent months, although sales remain around 30% lower than last year. The number of people putting their property on the market for sale has risen so far this year, reinforcing the shift from a sellers' to a buyers' market since last summer, according to RICS data confirmed by Halifax Estate Agents.
- The housing sector is underpinned by continuing solid economic performance. The economy experienced its 51st consecutive quarter of growth in the first quarter of 2005, including record employment levels. Interest rates are low compared with the experience of the past 30 years; there has also been a doubling in the value of households' net housing equity over the past five years from £1,225 billion at the end of 1999 to £2,429 billion at the end of 2004.
Halifax says the outlook for the housing market is unchanged so it continues to forecast a modest decline of 2% in house prices this year across the UK. It adds that the market is underpinned by sound fundamentals, including record employment levels, good affordability and rising real earnings.
Commenting, Tim Crawford, Group Economist, said: "House prices fell by 0.6% in May and the picture for 2005 is one of a flat housing market. So far this year, prices are broadly unchanged with only a 0.1% fall. The annual rate of house price inflation was 5.7% in May and has fallen from 22.1% last July. It is now at the lowest rate since May 2001 and is likely to fall further over the coming months given the large monthly increases in the middle of 2004.
"We continue to forecast a modest decline of 2% in house prices this year across the UK. The market is underpinned by sound fundamentals including record employment levels, good affordability and rising real earnings."
At 0.5% for the first quarter, economic growth was just marginally below the UK's long-term average quarterly rate of growth of 0.6%. In fact, the UK delivered its 51st consecutive quarter of expansion, underlining the economy's good health.
The value of households' net housing equity has almost doubled over the past five years, increasing from £1,225 billion at the end of 1999 to £2,429 billion at the end of 2004.
The level of employment continues to increase, reaching a new record high of 28.608 million in the first three months of 2005. Interest rates also remain low compared with the experience of nearly the whole of the past 30 years. This has helped to constrain mortgage payments as a proportion of gross income for the average new buyer to 20%; just above the 19% average for the past 20 years and well below the 34% peak in 1990.
These factors underpin the sound health of the UK household sector's finances and continue to support the underlying state of the housing market. As a result, we expect only a modest decline in house prices this year of 2% across the UK.
The number of loans approved for house purchase rose for the third successive month in April to 95,000 from 92,000 in March (seasonally adjusted), according to the latest Bank of England figures. This was the highest level of approvals in nine months, providing further evidence that activity is stabilising. However, the number of loans was still 20% lower than a year ago and 11% below the five year average for monthly home loan approvals.
Estate agents have reported broad stability in market activity in the past few months following a sharp decline in the second half of 2004, although sales remain around 30% lower than last year. Buyer enquiries and newly agreed purchases were flat for a second successive month in April, according to the latest RICS survey.
The number of people putting their property on the market for sale has risen so far this year, reinforcing the shift from a sellers' to a buyers' market since last summer, according to RICS and confirmed by Halifax Estate Agents.
The number of first-time buyers (FTBs) has fallen significantly over the past few years as house prices have risen at a significantly faster pace than average earnings, making it increasingly difficult for people to enter the housing market for the first time. There were 361,000 FTBs in 2004 according to the Council of Mortgage Lenders (CML) — the lowest annual total in the past 20 years. This downward trend has continued with the number of FTBs in the first four months of 2005 29% lower than in the same period last year.
However, average house prices have begun to fall as a multiple of average earnings since last autumn, reflecting the slowdown in house prices. We expect this trend to continue over the coming months, making it a little easier for FTBs to enter the market.
