UK house prices could be showing signs of an early recovery with Halifax reporting a rise of 2.6% in May compared with April.

May’s increase followed three successive monthly declines of between 1.8% and 2.3% and leaves the cost of an average house at £158,565. However, in context, house prices are still down by 16.3% when compared to May 2008.

Halifax also emphasised the importance of not to place too much weight on any one month’s figures. Historically, house prices have not moved in the same direction month after month even during a pronounced downturn. For example, prices fell by 11% nationally during 1991 and 1992, but there were five monthly price rises in this period.

Affordability
The house price to earnings ratio – a key affordability measure – has declined by from a peak of 5.84 in July 2007 to an estimated 4.36 in May 2009. The ratio is now at a level last seen in January 2003. The long-term average is 4.0.

Lower interest rates have also boosted affordability. The proportion of disposable earnings devoted to mortgage payments has fallen significantly over the past 18 months. Nationally, typical mortgage payments for a new borrower have declined from a peak of 48% of average disposable earnings in 2007 Quarter 3 to 31% in 2009 Quarter 1. Mortgage payments relative to earnings are now below the long-term average of 37% recorded over the past 25 years.

The improved affordability means that more first time buyers are looking at what the house market has to offer. First-time buyers accounted for 40% of all those purchasing a home with a mortgage in March; the highest percentage since April 2005. The number of first-time buyers, however, remains very low and at 12,500 in March 2009 was one-third lower than a year earlier. (Source: CML).

Commenting, Nitesh Patel, Halifax housing economist, said: “There was a 2.6% increase in average UK house prices in May. This rise followed three successive monthly falls of between 1.8% and 2.3%.

It is always important not to place too much weight on any one month’s figures. Historically, house prices have not moved in the same direction month after month even during a pronounced downturn. For example, prices fell by 11% nationally during 1991 and 1992, but there were five monthly price rises in this period.

There are some tentative indications of a possible stabilisation in activity, albeit at a low level. Bank of England industry-wide figures show that the number of mortgages approved to finance house purchase – a leading indicator of completed house sales – increased by 19% between the final quarter of 2008 and the first quarter of 2009, on a seasonally adjusted basis. Approvals in the three months to March were 45% lower than in the same period in 2008.

House sales remain substantially below their long term average and market conditions are expected to remain difficult with housing activity continuing at low levels over the coming months.”