House Price Fall Biggest In 15 Years

Mortgages and Home

Updated on 16 December 2008 | 0 Comments

The price of the average UK home fell by £4600 in May. Today's 'no change' base rate decision means that further falls look very likely.

Investors in residential property got more bad news today. The price of the average UK home fell by £4600 in May alone (a 2.4% fall), and prices have fallen 3.8% over the last year, according to the Halifax House Price Index. That's the biggest monthly fall for 15 years.

House prices are also at their lowest point since September 2006.

The reasons for this fall are pretty well known:

  •           The credit crunch has made it harder for some people to get a mortgage which has in turn reduced demand for homes
  •           Rising prices and higher taxes have put pressure on household budgets
  •          The long housing boom has meant that prices have risen to a high level when compared to average salaries

On the other hand, bullish property investors argue that a shortage of land, high employment and relatively low interest rates mean that future house price falls shouldn't be too great.

But I'm not convinced. The problem is inflation. It jumped from 2.5% to 3% in April and things may get worse before they get better. Especially when you look at what is happening to the price of food and other essential resources such as oil.

And that's why The Bank of England didn't cut the base rate today. The bank is mandated to keep inflation at 2%, and a base rate cut would have given a further fillip to inflation just when it isn't needed.

So that's bad news for stretched mortgage borrowers looking for some relief. The only `good' news from their perspective is this week's report from The Chartered Institute of Purchasing and Supply. The institute's figures showed that service sector activity slipped from 50.4 to 49.8 in May -- falling below the 50 level indicates stagnation and a slowdown.

A slowing economy may mean that the Bank of England feels able to cut the base rate later this year. But I wouldn't bet on it. The commodities boom may mean we're returning to 70s-style `stagflation' when prices rose at the same time as the economy contracted. Scary stuff.......

More: Find a marvellous mortgage via The Fool | Is Gazundering Ethical?

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