UK house prices drop in May: Tug of war as high price-to-earnings ratios and a lack of supply affect market

Billy Ehrenberg
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Mortgage approvals jumped last month to a four month high (Source: Getty)

UK house prices dropped for the first time in three months this May, according to data from Halifax. The market is feeling the effects of a tug of war as a lack of supply drives prices higher, stretching finances and affecting sentiment.

The figures

On a monthly basis – the most volatile measure – house prices fell by 0.1 per cent in May, a change within the margin for error. They last fell in February – at a rate of 0.4 per cent.

For the three months to May, the average price of a house was two per cent higher than the preceding three months, but the rate of growth slowed again – from 2.6 per cent at the last measure.

Read more: The proportion of house buyers shunning mortgages for cash purchases has hit a record high

Compared to the March to May period last year, prices were 8.6 per cent higher, a 0.1 percentage point increase on April’s 8.5 per cent.

Why it’s interesting

House price growth (on a three-month annual basis) has been stuck between eight and nine per cent since October last year, with the sole exception of December (7.8 per cent).

Growth, then, may be below last year’s July-high of 10.2 per cent, but it is remarkably steady. The Halifax figures come a day after a report by Nationwide showed annual growth had fallen to an annual rate of 4.6 per cent - its lowest since August 2013.

On the one hand, a shortage of properties for sale could be driving prices up, but an April price-to-earnings ratio of 5.2 (estimated) is high – it hasn’t been higher since April 2008. This means finances are stretched and price growth could be muted as a result.

High ratios have meant that those people buying houses without mortgages now make up the largest ever proportion of total house sales, according to a report by Nationwide.

Mortgage approvals jumped last month too – to a four-month high – showing that any election jitters were mild. The month-on-month increase was just as eye-catching - at 9.9 per cent it was the biggest jump since April 2009.

What the analysts said

Martin Ellis, housing economist at Halifax, said:

Housing supply remains extremely tight with the stock of properties available for sale currently at its lowest level for many years. At the same time, ongoing economic recovery, increasing employment, real earnings growth and very low mortgage rates are all supporting housing demand. This combination has kept annual house price inflation well above earnings growth although activity levels are subdued.

The imbalance between supply and demand is likely to continue to push up house prices over the coming months. Looking further ahead, the increasing level of house prices in relation to earnings is expected to dampen house price growth.

In short

Demand pulls one way and stretched finances the other. The effects could well lead to price growth staying in the eight to nine per cent sweet spot for a while longer yet.

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