Quarterly house price data provides a clearer indication of the overall market trends, smoothing out the volatility caused by reduced number of monthly transactions in all house prices indices’ monthly figures.
The underlying pace of house price growth has turned moderately negative in recent months. Prices fell by a modest 0.3% between the first and second quarters of the year. By comparison, the quarterly rate of decline was consistently in excess of -5% throughout the second half of 2008.
Housing market activity is softening. Bank of England industry-wide figures show that the number of mortgages approved to finance house purchase fell for the fourth consecutive month in August, on a seasonally adjusted basis. The number of approvals was at it its lowest level in the past six months, at 47,372.
House prices still remain higher than a year ago. Prices in September were 2.6% higher on an annual basis as measured by the average for the latest three months against the same period a year earlier. This continues the recent downward trend from a high of 6.9% in May and was below the 4.6% increase in August.
Reduced demand and higher supply puts downward pressure on prices. A shortage of properties for sale in 2009 contributed to an imbalance between supply and demand and was a key factor driving up house prices last year.
An increase in the number of properties available for sale in recent months, together with a decline in demand, has reduced the imbalance, putting some downward pressure on prices in recent months.
New sales instructions with estate agents increased for the seventh successive month in August whilst demand – measured by new buyer enquiries – fell for the third month in a row, according to the latest RICS monthly survey.
The low interest rate environment has reduced the burden of servicing mortgage debt. Typical mortgage payments for a new borrower have fallen from a peak of 48% of average disposable earnings in mid 2007 to 30% in mid 2010.
This key measure of affordability is at a better level than the long-term average over the past 25 years (37%) and is an important factor supporting housing demand.
Commenting, Martin Ellis, housing economist, said:
"Looking at quarterly figures - a better measure of the underlying trend, house prices in the third quarter of 2010 were 0.9% lower than in the second quarter of 2010. This rate of decline is significantly slower than the quarterly changes of between -5% and -6% that were seen in the second half of 2008.
"It is therefore far too early to conclude that September's monthly 3.6% fall is the beginning of a sustained period of declining house prices. A shortage of properties for sale contributed to an imbalance between supply and demand and was a key factor driving up house prices last year.
"An increase in the number of properties available for sale in recent months has reduced the imbalance. At the same time, renewed uncertainty about the economy and jobs has caused consumer confidence to falter recently, dampening the demand for home purchase. Together, these factors have been exerting some downward pressure on prices in recent months.
"In addition, volatility of the month on month measure has increased due to the low transaction levels across the market; this underlines the difficulty of getting a clear reading on the current state of the housing market.
“Prospects for the housing market remain uncertain. Earnings growth is expected to be very modest over the next year, tax rises are on the way and more people are putting their homes on the market. These will all be constraints on the market, dampening house prices.
"On the positive side, we expect interest rates to remain very low for some time, which will underpin the improved affordability position for homeowners."
Alan Cleary, managing director of Precise Mortgages, said:
“The property market is pausing for breath ahead of the government spending review scheduled later this month. This has led to lower transaction volumes from buyers and sellers and lending levels as a result. But this dramatic fall in prices is representative of the volatility we’re likely to see more and more of across all the simpler house price indices.
"Halifax's lending levels are significantly lower than in the past so it’s no surprise to see fluctuations in its index. Until lending volumes rise and transactions pick up we are going to continue seeing a lot of distortion in house price monitor outputs.”
