House prices saw their largest month-on-month rise in seven years in May, adding to signs that the market may be stabilising after falling almost without interruption since the end of 2007.
Prices rose by 2.6 per cent to an average of £158,565, according to the Halifax index published on Thursday. This was the biggest month-on-month gain since 2002 and the 11th biggest rise since the survey began in 1983, but followed three months of sharp price falls.
Comparing the past three months to the previous three months – a better indicator of the underlying trend – prices still fell by 3.1 per cent. Although significant, this was less than the 5 to 6 per cent declines seen through the second half of last year.
During the housing bust of the 1990s, sharp price falls were often interspersed with occasional gains. Prices fell by 11 per cent nationally during 1991 and 1992, but managed to rise during five months in that period.
House prices are 16.3 per cent below their level of a year ago, and 21 per cent down from their peak value in mid-2007, according to the Halifax. The Nationwide survey shows similar falls in value.
But the large leap in prices last month follows a slew of other evidence that the precipitous declines of last year are easing off, and adds to the sense that the economy has met the bottom of the recession.
“There are clear signs emerging that the UK housing market has turned the corner,” said Alan Clarke, of BNP Paribas.
The Nationwide survey also suggested that prices rose last month, for the second time in three months. The Royal Institution of Chartered Surveyors study of buyer intentions is at a decade high and mortgage approvals have risen for four out of the past five months after reaching an all-time low last November.
However, most economists believe a robust housing recovery remains some way off. “This isn’t the start of a boom but it may be like a guy on the bottom of bungee wire,” Mr Clarke added.
Michael Saunders, economist at Citigroup, said: “We doubt that house prices will quickly swing from declines to persistent gains of 2 per cent-plus, because of the ongoing rise in unemployment, low loan-to-value ratios and withdrawal of many lenders from the mortgage market.”
Banks are still leery of granting mortgages, and deposit requirements for the key first-time buyer market remain close to all-time highs.
Meanwhile, the house price to earnings ratio – a measure of affordability – fell to 4.36 in May, the lowest level since January 2003 but still above the long-term average of four. There is a risk the ratio will undershoot its trend value, especially given that the squeeze on credit has spelt an end to easy mortgages for the time being. That would point to further price falls.
Levels of transactions remain weak. Mortgage approvals have been rising but are almost 60 per cent below their long-run average, and below the level some economists believe is consistent with stable prices.
MPC holds interest rates
The Bank of England’s monetary policy committee voted on Thursday to keep its key rate on hold at half a percentage point and to press ahead with its £125bn ($201bn) asset purchase programme, writes Norma Cohen.
The decision to hold both conventional and unconventional monetary policy steady comes against a backdrop of more optimistic official data and surveys which, together, suggest the economy is past the worst of the recession.
The MPC said it expected its asset purchase programme to take another two months to complete. It added that it would keep it “under review”.
Some economists reiterated their suggestion that if lending to the private sector failed to pick up, the Bank might need to expand the programme to the maximum £150bn initially authorised, even if other economic data showed an improving outlook. However, some said that while the size of the programme might not change, the maturities and the nature of the assets chosen for purchase might do.
So why are savings rates still falling?: