UK house prices fall 1.7% in July

House prices fell by 1.7% in July, according to the Halifax House Price Index. This was smaller than the falls in both the previous two months - May (-2.5%) and June (-1.9%).

The average price in July 2008 was £44,980 (34%) higher than in July 2003 and £104,888 (145%) higher than a decade ago in July 1998.

The annual rate of house price inflation - measured by the average price over the three latest months compared with the same period a year earlier - was -8.8% in July. UK average prices, at £177,351, have returned to where they stood in June 2006.

There has been a fall in 'real' earnings over the past year with average earnings increasing by 3.8% in the year to May compared to a 4.3% increase in the headline rate of retail price inflation. Rising food and fuel prices - which have increased by 11% and 14% respectively over the past year - have also contributed to a reduction in the discretionary income available to households. (Source: ONS)

The high level of average house prices in relation to earnings has made it difficult for potential house purchasers, particularly first-time buyers, to enter the market. The decline in credit availability resulting from the crisis in the financial markets is further constraining buyers. These factors, combined with the pinch on spending power, have significantly curbed housing demand, causing house prices to fall.

The number of mortgages approved to finance house purchase in Quarter 2 2008 was 60% lower than in Quarter 2 2007. (Source: Bank of England)

Whilst both the number of new buyers interested in home purchase and agreed sales continued to fall, the pace of decline slowed for the second consecutive month in June. (Source: RICS)

The labour market is the key driver of the housing market. The number of people in employment increased by 61,000 over the three months to May compared with the previous quarter and by 413,000 over the past year to a record 29.59 million.

The average mortgage rate paid by all borrowers - i.e. the average rate on outstanding mortgage loans -fell by 21 basis points during the first half of 2008 from 5.97% in December 2007 to 5.76% in June 2008. This decline happened despite a rise in the average mortgage rate paid by new borrowers - from 5.77% in April to 5.91% in June - as many existing borrowers benefited from the effects of the reductions in the Bank of England's key rate. (Source: Bank of England)

The clear slowdown in the UK economy should curb inflationary pressures over the medium term, eventually providing the Bank of England with sufficient scope to lower interest rates. The MPC, however, is unlikely to reduce rates whilst the current rate of consumer price inflation continues to accelerate, moving further away from the government's 2% target. On balance, we expect the Bank rate to remain unchanged at 5% for the remainder of 2008.

Suren Thiru, Halifax economist, said: "House prices fell by 1.7% in July. Pressure on householders' income, together with a very significant reduction in mortgage finance due to the global financial markets crisis, is constraining potential house buyers' ability to enter the market.

“This is resulting in both lower prices and activity levels.

“A solid labour market, low interest rates and a shortage of new houses continue to support the market. The labour market is the key driver of the housing market and the number of people in employment is at a record high."