House prices in 2011 Quarter 2 (April to June) were 0.5% lower than in the previous quarter. This was the smallest quarterly fall since 2010 Quarter 2 (0.0%).
The average UK house price in June was broadly unchanged from that in December 2010 on a seasonally adjusted basis.
On an annual basis, prices in June were 3.5% lower as measured by the average for the three months to June against the same period a year earlier. This was an improvement on the annual rate of -4.2% recorded in May.
Low interest rates have helped to improve affordability. Typical mortgage payments for a new borrower have fallen from a peak of 48% of average disposable earnings in mid 2007 to 28% in 2011 Quarter 2.
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. Mortgage rates have fallen from an average of 5.84% to 3.85% over this period.
The recent increase in employment may also have been an important factor supporting the market.
The number of people in employment increased by 80,000 in the three months to April compared with the previous three months and by 376,000 on an annual basis, according to the latest figures from the ONS.
The improvement in price trends is consistent with the tightening in market conditions earlier this year. The ratio of house sales to the stock of unsold properties on surveyors' books, as measured by the RICS monthly survey, has historically been a good predictor of short-term house price movements.
This ratio increased modestly between January and April, providing evidence of a slight tightening in market conditions and indicating a possible improvement in the house price trend over the coming months.
The ratio, however, fell in May, according to the latest survey. It is too early to know if this was primarily due to distortions caused by the unusual succession of public holidays in late April and early May.
Housing activity stable. The number of mortgages approved to finance house purchase is a leading indicator of completed house sales. The industry-wide number of approvals has remained within the range of 45,000-50,000 per month since the beginning of 2010, indicating broad stability in market activity.
Encouragingly, approvals in the three months from March to May were 2% higher than in the preceding three months on a seasonally adjusted basis, according to the latest Bank of England figures.
Commenting, Martin Ellis, housing economist, said:
"House prices in the three months to June were 0.5% lower than in the previous quarter. This was the smallest quarterly fall in prices since the second quarter of 2010. There was a 1.2% rise in prices in June.
"Low interest rates, an increase in the number of people in employment and some tightening in market conditions earlier in the year are likely to have been the main factors behind the recent improvement in price trends.
"A slowly improving economy and sustained low interest rates should help to support broad stability in the market over the coming months.
"The market is, however, likely to continue to face significant headwinds which are expected to constrain housing demand. Low earnings growth, higher taxes and relatively high inflation are all continuing to put pressure on household finances."
