UK house prices rise in January

House prices increased by 1.3% in January, according to the latest Halifax House Price Index. The mixed pattern of monthly price rises and falls in December and January is consistent with a slowing market.

Two key indicators of housing market activity fell in December. Firstly, the number of mortgage approvals to fund house purchase declined from 129,000 in November to 113,000 in December. Secondly, new buyer enquiries fell in December for the first time since May 2005.

Negative real earnings growth for only the second time in over ten years – average earnings growth, at 4.1%, is below the rate of increase in retail prices of 4.4% – is putting pressure on householders' finances.

Together with higher interest rates, slower economic growth and a fall in the level of full-time employment (down by 77,000 in the latest quarter), negative real earnings growth will curb housing demand. We predict that annual house price inflation will ease from 10% to 4% by the end of 2007.

Commenting, Martin Ellis, chief economist, said: "House prices increased by 1.3% in January, leaving the annual rate of house price inflation unchanged at 9.9% compared with December. The mixed pattern of monthly price rises and falls in December and January is consistent with a slowing market.

Negative real average earnings growth for only the second time in over ten years, combined with higher interest rates and slower economic growth will squeeze householders' finances, causing potential homebuyers to be more cautious and constraining housing demand. Accordingly, we predict that annual house price inflation will ease from 10% to 4% by the end of 2007."