Annual house prices drop by 12.4%

UK house prices fell by 1.3% in September, the smallest monthly fall for seven months according to the latest data from the Halifax.

House prices in September were 12.4% lower on an annual basis, meaning that the average house price is now £172,108, close to the level it was at in January 2006 (£170,866).

Additionally, there are signs of improved affordability. The House price to earnings ratio - a key measure of housing affordability - has fallen from a peak of 5.84 in July 2007 to 5.02 in July 2008 (latest available). This is the lowest level for more than four and a half years (February 2004: 5.01). Halifax said that it expects a further improvement in the ratio as prices continue to soften. The long-term average is 4.0.

Mortgage Rates
The average mortgage rate paid by new borrowers has risen by 22 basis points over the past year from 5.88% in August 2007 to 6.10% in August 2008 despite a 75 basis points cut in Bank rate over the period. This increase reflects the significant rise in lenders’ funding costs since the beginning of the financial markets crisis.

The average mortgage rate paid by all borrowers (i.e. the average rate on outstanding mortgage loans), however, has fallen slightly over the same period, from 5.91% in August 2007 to 5.83% in August 2008 as those on existing tracker rates have benefited from the Bank of England rate cuts. (Source: Bank of England)

Commenting, Martin Ellis, Halifax chief economist, said: “House prices declined by 1.3% in September. The overall price decrease in the three months to September was very similar to that in the previous quarter, indicating that the trend rate of decline may be beginning to stabilise.

The ongoing pressures on householders’ income, combined with the reduction in the availability of mortgage finance, however, mean that market conditions will remain challenging.”