UK house price inflation fell in August according to the Office of the Deputy Prime Minister, giving further indications of a slowdown in the property market. Annual inflation fell to just 2.8 per cent in August, down from 4 per cent in July and 13.6 per cent a year ago. But

The Financial Times house price index, which offers a more current picture of the housing market, reported last Friday that this slowdown continued in September with inflation falling to its lowest level for more than nine years.

The ODPM reported that house price growth in London, which tends to lead overall trends in the market, slowed to 0.8 per cent from 0.9 per cent in July. The average house price in the UK barely changed in August, standing at £186,208 compared with £186,207 in July.

Last Thursday, Halifax said the housing market was stabilising with prices rising only slowly. The 3 per cent annual increase that the mortgage lender recorded is well below the 20.5 per cent rate increase it reported in the third quarter of 2004.

Some analysts have concluded that these numbers suggest that the market might be stabilising at current levels. House prices have been stagnant throughout 2005 while housing market activity has picked up strongly in recent months.

“A sharp correction in house prices currently looks very unlikely (but) we remain sceptical that house prices are set to see sustained sharp rises any time soon,” said Howard Archer, an economist at Global Insight

“Most affordability ratios are still stretched and will only improve gradually over the coming months,” added Mr Archer.

But there will be continued concern that as house price inflation on all the main indicators heads towards zero, the current stability in the market will not last. Nervousness is likely to increase as property investors realise they can no longer rely on the prospect of capital gains to offset the reality of low rental yields.

Recent data from the Bank of England show that mortgage approvals have picked up to their highest in over a year, which analysts say suggests turnover should pick up from low levels in the coming months. The BoE cut rates for the first time in more than two years in August, to 4.5 per cent but has left rates unchanged in September and October.

Analysts are divided on when and what the next move will be but financial markets are bracing for another quarter point cut by early next year.

According to Simon Rubinsohn, the chief global economist for the Barclays group’s Gerrard Investment, despite the lower inflation level, house prices remain at record levels. “Today’s figures are unlikely to have a major bearing on the MPC’s thinking. Money markets are still not convinced by a November cut but the odds have shortened in recent weeks. Our best guess is that the authorities may wait a little longer and want more evidence that the spike in inflation is temporary. But it is likely to be a close call.”

A separate survey of English housing 2004/2005 by the ODPM estimated that in 2005, there were 14.6m owner occupiers in England (71 per cent of the total), 3.7m (18 per cent) social tenants and 2.4m (12 per cent) private.

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