House price growth moderates

Figures that track the housing market continue to give out conflicting signals. It is, however, becoming clear the market is slowing. House prices appear on track to ease from the era of double-digit growth experienced over the past couple of years to a more sustainable rate.

House prices increased by 2% in the second quarter of this year, less than the 3% increase in the first three months of 2007 and well below the 4.2% rise in the final quarter of last year. The average house price now lingers just below £200,000 at £196,818. The average house price has almost doubled in the past five years, since 2002, when it was around £100,000On a monthly basis, house prices increased by 0.4% in June; the second successive monthly rise of less than 0.5%. The annual rate of house price growth has eased slightly from 11.1% in March to 10.7% in June.

Regional Picture
House prices increased in most regions during the second quarter of 2007. Northern Ireland continued to stand out as an area of exceptional growth and reported the highest rise (8.5%). These further rises ensure Northern Ireland is now the most expensive part of the UK outside London and the South East. No small achievement considering that in early 2005, Scotland was the only part of the UK with lower average house prices than Northern Ireland.

Focusing on regions within England, Q2 puts eyes on the North. After a modest rise of 1.6% during the first quarter of the year prices in the North have grown at a much stronger level of 4.3% during the period.

This latest rise pushes the average house price in the North through the £150,000 barrier for the first time. Greater London, however, reported slightly stronger growth than the North, at 4.9%. This puts the average price in Greater London at twice that of prices in the North, further widening the North/South divide.

There were price falls in Q2 2007 in the South West (-0.4%), West Midlands (-1.1%) and Wales (-2.8%). These modest declines, however, should be seen in the context of the substantial price rises recorded in all three areas over the past five years – South West (63%), West Midlands (81%) and Wales (116%).

With the average price in the North now at £155,188, Scotland (£140,262) and Yorkshire and the Humber (£149,051) are the only parts of the UK where the average price remains below £150,000.

The Annual View
Northern Ireland recorded the biggest price rise (46.7%) in the UK over the past year, taking the average price to £228,790 at the end of Q2 this year.

Prices in Northern Ireland have been driven up by a combination of a strong local economy, high levels of immigration and high demand for properties from second-home buyers and buy-to-let investors in the Republic of Ireland.

Greater London recorded the biggest increase in prices in Britain during the past year (18.4%), largely reflecting the strength of the capital’s economy.

The smallest price rises have been in the West Midlands (5.5%) and East Midlands (6.6%) where affordability, particularly for first-time buyers, has been an increasing issue.

The North/South divide has re-emerged over the past year. Greater London, the South East (14%), East Anglia (10.9%) and South West (10%) all recorded double-digit house price growth since Q2 last year. All the other English regions have seen single-digit growth. As a result, the difference between the average price in Northern England and that in the South has widened from £81,681 in Q2 2006 to £103,451 in Q2 2007.

Activity Continues To Ease
According to the Bank of England the housing market continues to ease, with the number of mortgage approvals to fund house purchases falling by 4% in April to a seasonally adjusted 107,000. Approvals were at their lowest level for 12 months and 16% below the peak of 128,000 in November 2006.

Outlook For The Housing Market
The rise in mortgage rates since last summer – both for fixed and variable products – is curbing demand and will continue to act as a constraint over the coming months.

The latest Office of National Statistics figures show annual headline average earnings growth, at 4%, to be below retail price inflation of 4.5% in April.

Persistent negative real earnings growth so far this year is also expected to weigh down on housing demand. As a result, we expect annual house price inflation to slow during the second half of 2007.

That said, a healthy economy and strong labour market continue to underpin housing demand. Gross domestic product has grown at above its long-term average pace in the first quarter of 2007 with a 0.7% increase. According to ONS data, the number of people in employment has grown by 87,000 over the past year, to 29.01m.

A shortage of both new housebuilding and secondhand properties for sale continue to support house prices. According to the Royal Institution of Chartered Surveyors the stock of unsold property on estate agents’ books has fallen this year and remains well below its long-term historical average.

Where Homeowners Stand
There is a widespread expectation that a further quarter point rise in the Bank of England base rate will occur before the end of the year.

When considering how any future increases of the Bank of England base rate will affect the mortgage market one should remember that the vast majority of new borrowers are on fixed-rate mortgage deals, and therefore will not feel the immediate effect of any changes in the Bank of England base rate.

Upward movement of money markets have in turn driven up the prices of fixed rate mortgages over the past few months. Homeowners coming to the end of two-year fixed deals this year will therefore need to accommodate an increase in their monthly payments.

According to the Council of Mortgage Lenders, the average rate of a fixed mortgage in 2005 was 5.18%. A borrower with a £100,000 mortgage at this rate would be making monthly repayments of £592.65. When the deal expires this year, assuming the borrower moved onto the average fixed rate available today (around 5.99%), the new monthly repayments would be £637.63 – an increase of around 8% or £45.

Going forward, a continued moderation in house price growth is expected.