UK house prices drop 0.5% in October

House prices fell by 0.5% in October, according to the latest Halifax House Price Index. Overall, house prices in the three months to October were 0.3% higher than in the previous quarter. This continues the steady downward trend experienced since the end of 2006.

The continuing strength of the UK economy and the associated expansion in employment will provide a sound underpinning for the housing market over the coming months.

Gross domestic product (GDP) increased at an annual rate of 3.3% in 2007 Q3, comfortably above the long-term average rate of 2.5%.

The number of people in employment has increased by 82,000 over the past year to a record total of 29.10 million. There was a 22,000 increase in employment during the three months to August compared with the preceding three months.

… and persistent supply shortages will also support house prices

The stock of unsold property on estate agents' books fell in September to the lowest level since May 2005. Continuing supply shortages of both secondhand properties for sales and an ongoing failure of the rate of housebuilding to match the pace of new household formation will also support house prices.

Mixed pattern of monthly rises and falls is consistent with a more subdued market

October's fall follows a 0.6% decrease in September. A mixed pattern of monthly price rises and falls is a typical feature of a more subdued housing market. For example, there were six monthly falls and six monthly increases between July 2004 and June 2005 as the market slowed in response to a series of interest rate rises during 2004. It is not unusual to see successive monthly falls in these circumstances.

Annual rate of house price growth back in single figures

The annual rate fell to 8.9% in October from 10.7% in September. The annual rate fell for the second successive month – from a peak of 11.4% in August – bringing the annual rate back to single figures for the first time since February 2007. The annual rate should decline further over the next few months as the strong monthly house price gains during the autumn of 2006 drop out of the year-on-year comparisons.

Market activity is declining

Mortgage approvals to fund house purchase fell by 6% in September to 102,000 (seasonally adjusted). Approvals in 2007 Quarter 3 - July to September - were 11% lower than in 2006 Quarter 3.

New buyer interest in purchasing a house fell for the tenth consecutive month in September, and at the fastest pace for more than three years, demonstrating that potential buyers have become more cautious.

Commenting, Martin Ellis, chief economist, said: "The rise in interest rates since August last year and negative real earnings growth so far this year are curbing housing demand, leading to a slowdown in both price growth and activity.

“The UK economy is in a strong position. Sound market fundamentals, including high levels of employment and a shortage in the number of properties available for sale, will continue to support house prices."