House prices fell 2.4% in May

House prices fell by 2.4% in May, according to the latest Halifax House Price Index. Prices were 3.8% lower on an annual basis.

Commenting, Martin Ellis, chief economist, said: "House prices fell by 2.4% in May. Price falls should be measured against the significant gains in recent years. The average UK house price rose by more than £88,000, or 79%, between August 2002 and August 2007.

The decline in prices is caused by the difficulties created for potential house purchasers by the rapid rise in house prices in the last few years, a squeeze on spending power and the reduction in credit availability. These factors have curbed housing demand. High employment levels, low interest rates and a shortage of new homes support housing valuations."

Price falls partly due to squeeze on household incomes

There has been little change in 'real' earnings over the past year. Average earnings rose by 4.0% in the year to March compared to a 3.8% increase in the headline rate of retail price inflation over the same period. Sharp increases in both fuel (9%) and food prices (7%) over the past year have helped to reduce the discretionary income available to households to fund house purchase.

Housing market activity continues to decline

The number of new buyers interested in home purchase fell for the seventeenth successive month in April. The decline was at the fastest pace since this data was first collected in April 1999, highlighting the sharp decline in housing demand. (Source: RICS)

The number of mortgages approved to finance house purchase - a good leading indicator of house sales - in April 2008 was 49% lower than in April 2007 at 58,000.

High employment, low interest rates and a shortage of new homes support housing valuations. Employment increased by 117,000 in the three months to March compared with the preceding quarter and stands at a record high 29.54 million. The UK economy is forecast to slow during the course of 2008, recording below trend growth for the first time since 2005. We expect unemployment to rise somewhat during the year due to this easing in growth. The scale of the increase in unemployment is unlikely to cause widespread difficulties for households.