This was the tenth monthly fall in the last five years, a period when prices in the UK have more than doubled.
House prices have increased by 1.8% during the past three months. This is significantly below the 6.5% rise recorded in the preceding three months. It is becoming increasingly clear that the five rises in interest rates since November 2003 are acting as a brake on house price growth.
A number of other key market indicators have shown a softening in housing market activity over the past few months. These indicators, however, show that activity levels remain at historically high levels and are consistent with a moderating housing market.
Other reports have backed up the findings. For example, the monthly RICS survey has shown both a rise in the stock of unsold properties on estate agents' books and a fall in buyer enquiries in recent months. Both developments are indicative of a fall in housing market activity. Nonetheless, the stock of unsold properties remains at a low level on a historical basis and is still 14% lower than a year ago. Additionally, the fall in buyer activity has been less pronounced than during the Iraq war in 2003.
The number of mortgages approved for house purchases fell in July for the second successive month and was 27% below its peak in December 2003 on a seasonally adjusted basis, according to the latest Bank of England figures. The number of approvals in the three months to July, however, remained 3% above the average quarterly level recorded over the past five years.
These indicators show that activity levels remain at historically high levels despite recent signs of weakening. These results are consistent with a moderating housing market.
UK economic growth, at 3.7%, remained comfortably above its long-term average rate in the second quarter of 2004, data from the ONS says. This strong economic performance has resulted in high levels of employment – the total number in employment has risen by 443,000
over the past two years to 28.29m. The claimant count unemployment rate has fallen to its lowest level in more than twenty-five years at 835,200 – 2.7% of the workforce – following a 102,400-drop in the past year. A buoyant labour market has contributed to the ongoing strength of the housing market.
Halifax says it expects higher interest rates to temper activity and predict that GDP growth will ease from approximately 3.5% in 2004 to around 2.5% next year - more in line with long-term historical average growth rates. Despite this slowdown, economic growth is likely to remain at levels that will maintain a strong labour market, therefore underpinning housing demand. Sound demand, combined with ongoing housing supply shortages, will support house prices.
Recent interest rate rises and constraints on first-time buyer affordability will, however, curb house price inflation and activity. The difficulties faced by potential first-time buyers in entering the market are underlined by the latest Council of Mortgage Lenders figures, showing that first-time buyers took out only 28% of home loans in the three months to July, significantly below the 44% average over the past ten years. The lender expects house price growth to moderate over the remainder of 2004 and into 2005.