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Halifax releases house price index for October

Amanda Jarvis

November 4, 2004

– House prices fell by 1.1% in October. Over the past year, house prices have increased by 18.5% with the annual rate of growth now below 20% for the first time in six months.

– On a quarterly basis, houses prices fell by 0.4% between July and October. This is the first fall on a three monthly basis since the last quarter of 2000.

– There are tentative signs that the ratio of house prices to earnings may have peaked at 5.63 in July with a slight decrease to 5.57 in August (the latest available figure). The recent series of interest rate increases have raised mortgage payments as a percentage of earnings from 14% to 19% for new borrowers over the past year. This remains well below the peak of 34% in 1990, however.

– Other indicators of the housing market confirm a softening in housing market activity. Data from the Bank of England and the Council of Mortgage Lenders points to a moderation in home lending, while surveys of estate agents point to some decrease in buyer interest. Figures from Halifax Estate Agents show a fall in the number of sales agreed over the past few months.

– Housing market fundamentals remain sound. Interest rates, while they have risen, seem likely to peak near current levels. Employment and household incomes, two very important drivers of the housing market, continue to grow. Additionally, supply constraints, especially in the south of England, will also underpin the market.

Commenting, Martin Ellis, Chief Economist, said: “The housing market seems to be moving into a slowdown following the period of strong growth in 2003 and early 2004. The rises and falls we have seen in prices in recent months are part of the ebb and flow of the market as it finds a new base. October's 1.1% fall follows a 1.3% rise in September.

Recent price movements confirm that the Bank of England's rate hikes have taken impetus away from housing demand while first-time buyers continue to be held back by affordability constraints.

We expect house price growth to continue to moderate into 2005 as the Bank of England's rate increases and first time buyer affordability constraints dampen demand. Market fundamentals remain sound. Interest rates, while they have risen, seem likely to peak close to current levels. Economic growth remains above its long-term average rate and employment and incomes continue to rise. Supply constraints, especially in the south of England, will also underpin the market.

The rapid rise in house prices over the past few years has resulted in a substantial increase in the amount of housing equity held by homeowners. We estimate that the value of housing assets exceeded the value of outstanding mortgage balances by £2,200 billion at the end of 2003. This represented a more than doubling in housing equity since 1998 and was well above the £900bn at the end of 1989.

Buyers have been putting down bigger deposits than in previous cycles. 83% of all borrowers took out a mortgage of less than 90% of the house price in the third quarter of 2004, according to the latest figures from the CML, compared with 56% in 1989 and 1990.”

Recent house price performance has parallels to 1999/2000…..

The moderation in house price growth in recent months has similarities to the performance of the housing market during the previous Bank of England monetary policy tightening cycle in 1999 and 2000. Between September 1999 and February 2000 base rates rose from 5.00% to 6.00%. House prices subsequently fell in four out of the twelve months following the first rate rise, and the annual rate of house price inflation slowed from a peak of 16% in January 2000 to 1% in January 2001.

Broader indicators of the housing market point to moderation…..

Other indicators of the housing market have lost some momentum since mid-year but the general trend is a move from above average levels of activity back to the long-term trend. The number of loans approved for house purchase fell by 20% between the second and third quarters of 2004, according to the Bank of England. Despite this fall, the number of loans in the third quarter was close to the long-term average, at a monthly average of 94,000 during July to September compared with the monthly average of 97,000 since 1987.

The latest RICS survey reported a fourth consecutive monthly rise in the stock of unsold properties on estate agents' books in September resulting in a 9% rise since May. However, the stock of unsold properties is still 6% lower than a year ago and remains below the longer-term average. These trends are confirmed by figures from Halifax Estate Agents, which also show a fall in the number of sales agreed over the past few months.

First time buyer numbers remain subdued ….

Affordability remains a key factor hindering the outlook for first time buyers. First-time buyers accounted for 28% of all new mortgages in the third quarter of 2004, according to the Council of Mortgage Lenders. Whilst there has been little change in the proportion of first-time buyers in recent quarters, it remains well below the longer-term average proportion of 44%.

Tentative signs that pressures on first-time buyers may ease ….

There are tentative signs that the ratio of house prices to earnings may have peaked at 5.63 in July with a slight decrease to 5.57 in August (the latest available figure). Further downward movement in this ratio would start to ease the difficulties faced by first-time buyers.

Mortgage payments remain low as a proportion of earnings despite rate rises…..

The series of bank base rate rises since last November have had an impact on housing affordability, raising mortgage payments as a percentage of earnings from 14% to 19% for new borrowers. This is in line with the long-term average and remains well below the peak of 34% in 1990.

UK economy remains strong …..

The UK economy remains in good shape with gross domestic product (GDP) in the third quarter 3.0% higher than a year earlier: comfortably above the long-term average growth rate of 2.5%.

Employment continues to rise and grew by 221,000 over the year to August with the numbers in employment at a record high level. The claimant count unemployment rate also continues to fall and is at a twenty- five year low of 2.7%.

Reflecting higher employment levels and also wages growth, household incomes increased by an above average 5.5% over the year to June 2004, according to the latest official estimates.


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