House price inflation continues to slow

House prices increased by 0.7% in July, according to the latest data from the Halifax. This is the fourth consecutive month they've grown by less than 1.0%, confirming that house price inflation is slowing. Annual house price inflation is now running at 11.2%, while the standardised average house price seasonally adjusted stands at £198,915.

Meanwhile, house prices increased by 1.3% between April and July. This was the smallest three monthly rise - a good indicator of the underlying trend - since August 2006. And it comes against a backdrop of mortgage approvals to fund house purchases falling in Q2 2007 by 8% and the level of new buyer interest in purchasing a house declining for the seventh successive month in June. Sources: Bank of England & RICS.

Homeowners who took out fixed rate deals two years ago will face higher mortgage payments when they re-mortgage. A borrower with a £114,000 mortgage, taking out a two year fix in 2005 at 5.08%, faces an increase in monthly payments of around £65, or 10%, when the deal expires this year. The overwhelming majority of these borrowers are expected to be able to absorb the increase in payments as earnings and housing equity have risen in the past two years.

Martin Ellis, chief economist of the Halifax, expects the downward trend in house price growth to continue as the five interest rate rises since last summer have an increasing impact on household spending and housing demand.

But sound economic fundamentals, high levels of employment and a shortage in the number of properties available for sale, particularly in London and the South East, will continue to support house prices.

Ellis adds that the increase in the proportion of borrowers taking out a fixed rate mortgage in recent years appears to have affected the timing of the housing market's response to interest rate changes. As a result, house price inflation and activity are likely to take longer to slow as interest rates rise because many borrowers are only affected when their fixed rate deal matures. In fact, the mortgage bank recently revised its house price growth forecast for 2007 from 4% to 6%. This upward revision largely reflects the greater upward movement in prices than expected during the first four months of the year.

Ellis goes on to note however that pressure on householders' finances is likely to curb housing demand over the remainder of 2007. The increase in mortgage rates since last summer is having an effect on housing affordability and will bite further during the coming months. Negative real earnings growth so far this year and rising food prices will also reduce the income households have available for housing.

Economic consultancy, Capital Economics, meanwhile is sticking to its long held view that annual house price growth will be markedly weaker by the end of the year, at around half its current rate.

It does acknowledge however that as the months goes by; the risks to that view are probably building on the upside. But the forces for a significant slowdown remain in place.

First, new buyer enquiries are falling steadily and mortgage demand is moderating.

In addition, the ratio of sales to unsold stock on RICS surveyors' books - a reliable historical guide to future house price growth - has turned down. What's more, the full impact of past interest rate rises is yet to be felt by the housing market. And, in the view of Capital Economics at least, there is still at least one more rate rise to come. CE is expecting house price growth to be down at around 5%y/y by end-2007.

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2007-08-02 11:52:25 © Moneyextra.com