House prices fall but mortgage affordability is improving

UK house prices fell by 0.5% in September according Halifax’s latest monthly house price index, taking the average house price to £161,132.  Prices for the third quarter (July to September) were up 01% on the previous quarter – the first quarterly rise since the beginning of 2010 and on an annual basis, house prices are 2.3% lower than a year ago which is a slight improvement on last month. 

These figures follow Nationwide’s latest index, released last week, which showed a rise in prices in September of 0.1%, although the conflicting results from these two lenders is no surprise.  In its statement, Halifax said that monthly house price figures remain volatile and that, “this mixed pattern is consistent with a market where prices are lacking genuine direction.”

Economic uncertainty and squeezes on householders’ finances are constraining housing demand whereas low interest rates and a rise in unemployment have helped prop up the market in recent months.  Overall, these factors have combined to create the benign conditions we’ve seen in the housing market so far this year and Halifax says it expects little change between now and the end of the year.

The good news is that low mortgage rates and cheaper monthly repayments continue to help borrowers – Halifax reported that “typical mortgage payments for a new borrower have fallen from a peak of 48% of average disposable earnings in mid 2007 to 26% in 2011 Quarter 3.”  The graph below charts typical mortgage costs as a percentage of income over the last 30 years and shows the improvement since the recent peak in 2007.

The ratio of house prices to average earnings - an indication of how affordable houses are - has also been improving in 2011 which will be particularly good news to first time buyers (see graph below).  This, along with low mortgage rates and a growing number of mortgages deals available to buyers with small deposits, should help more and more first timers get on the ladder – which in turn could offer more support to a housing market that’s in need of a boost.

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