House prices drop 1.3% in April

House prices fell by 1.3% in April and prices were 0.9% lower on an annual basis, according to the Halifax House Price Index.

Halifax expect a mid single digit percentage decline in UK house prices this year. There will be regional variations, however. Some areas of the country, such as Scotland, are likely to record modest price rises whilst other parts (e.g. Wales and West Midlands) are expected to see falls above the national average.

Price falls should be viewed in the context of the substantial price rises over recent years. UK prices nearly trebled (190%) over the ten years to August 2007. The average UK price rose by more than £130,000 between August 1997 and August 2007.

The decline in prices is driven by a squeeze on spending power and the rapid rise in house prices in the last few years. These factors have curbed housing demand. The rise in interest rates between August 2006 and July 2007 has increased average mortgage costs. A decline in 'real' earnings over the past year has also constrained housing demand.

A growing - albeit slowing - economy, high employment levels, low interest rates and a shortage of new homes underpin housing valuations. The economy grew at an annual rate of 2.5% in 2008 Q1; in line with the long-term average. Employment increased by 152,000 in the three months to February compared with the preceding quarter and stands at a record high 29.5 million.

More Bank of England interest rate cuts are expected over the coming months as signs of the expected economic slowdown accumulate. This evidence will help to allay the MPC's concerns regarding inflation over the medium term, providing scope to reduce rates.

This month Halifax look at housing transaction levels as part of our occasional series on key market developments. Transaction levels in recent years – averaging 1.16 million a year during 2005-2007 – have been much lower than during previous cycles (1.7 million in 1988).

Commenting, Martin Ellis, chief economist, said: "House prices fell by 1.3% in April. We expect a mid single digit percentage decline in UK house prices this year. There will be regional variations, however. Some areas of the country are likely to record modest price rises whilst other parts are expected to see falls above the national average.

Price falls should be viewed in the context of the substantial price rises over recent years. UK prices nearly trebled 190% over the ten years to August 2007. A growing economy, high employment levels, low interest rates and a shortage of new homes underpin housing valuations."