House prices fell by 1.8% in August, a similar figure to the previous two months – June (-1.9%) and July (-1.7%) - but lower than in March (-2.5%) and May (-2.5%), Halifax has said.

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 -10.9% in August, bringing the UK average price to a level where it was in early 2006 at £174,178.

Halifax found that the labour market is now the key driver of the housing market. The number of people in employment increased by 20,000 over the three months to June compared with the previous quarter and by 384,000 over the past year to a record 29.56 million.

The house price to average earnings ratio – a key affordability measure – has fallen from a peak of 5.84 in July 2007 to 5.13 in June 2008. We expect a further decline as prices continue to soften.

Stamp duty plans
The government’s announcement this week that it is raising the lowest stamp duty threshold from £125,000 to £175,000 for a year from 3rd September will reduce the stamp duty burden for a significant number of homebuyers. This brings the lowest threshold broadly in line with the current average house price.

Almost a quarter of a million (230,000) homebuyers in England and Wales would not have paid stamp dutyover the past year if the threshold had been £175,000 rather than £125,000. (There were a total of 475,623 sales below £175,000 over the four quarters from 2007 Q3 to 2008 Q2 with 245,414 below £125,000.)

In percentage terms, 49% of sales in the last year were below £175,000 compared with 26% below £125,000. Therefore, around a half of all sales would not have been potentially liable to stamp duty under the new criteria compared with one quarter under the previous £125,000 threshold.

First-time buyers (FTB), in particular, will benefit from the change to the stamp duty threshold. The average price paid by a FTB in Q2 2008 was £144,283 with an average stamp duty bill of £1,443. By comparison, the average FTB will pay no stamp duty over the next 12 months. The proportion of FTBs who would have paid stamp duty if the threshold had been £175,000 over the past year would have been 31% rather than the 60% of FTB purchases that were above the existing threshold of £125,000. Halifax estimates that a threshold of £175,000 rather than £125,000 would have removed 80-90,000 FTBs from the stamp duty tax net over the past year.

The temporary raising of the initial stamp duty threshold from £125,000 to £175,000 should reduce the stamp duty burden for a significant number of homebuyers, especially outside the south east of England. Almost a quarter of a million (230,000) homebuyers in England and Wales would not have paid stamp duty over the past year if the threshold had been £175,000 rather than £125,000.

Commenting, Martin Ellis, Halifax chief economist, said: “House prices declined by 1.8% in August. A solid labour market, low interest rates and a shortage of new houses continue to support the market. The pressure on householders’ income, together with the reduction in the availability of mortgage finance due to the global financial markets crisis, is resulting in both lower property prices and activity levels.

This week’s announcement on stamp duty is a welcome development and will benefit a significant number of homebuyers, particularly outside the south east of England. Market conditions, however, will remain challenging.”