UK house prices rise 0.3% in May

UK house prices increased by 0.3% in May, the smallest monthly gain this year and the third consecutive slowing in the monthly growth rate, according to the latest Halifax House Price Index.

The annual rate of house price growth nudged lower for the second successive month to 10.6% from a peak of 11.1% in March.

Further evidence that housing market activity is easing

Buyer interest in properties fell for the fifth consecutive month in April with the pace of decline increasing. (Source: RICS)

Mortgage approvals to fund house purchase fell by 4% in April to a seasonally adjusted 107,000. Approvals were at their lowest level for 12 months and 16% below the peak of 128,000 in November 2006. (Source: Bank of England)

Housing market conditions still tight but signs of loosening

The stock of unsold property on estate agents' books rose in April for the first time in six months. This increase in stock contributed to the first fall in the ratio of sales to available property stock since May 2006, indicating a loosening in market conditions. (Source: RICS) Nonetheless, market conditions remain tight and supply shortages – both new and secondhand properties –continue to exert upward pressure on house prices.

Solid economic conditions and high employment support housing demand

The UK economy continued to grow at above its long-term average pace in 2007 Q1 with GDP 0.7% up on the previous quarter and 2.9% higher on an annual basis, according to the latest estimate. The good health of the economy has underpinned a 93,000 increase in the number of people in employment over the past year. (Source: ONS)

Higher interest rates and the negative trend in real earnings growth are likely to cause house price inflation to moderate

The four interest rate rises since August 2006 have affected housing affordability, raising the monthly costs of servicing a mortgage. At the same time, there has been a squeeze on real earnings growth in recent months. Headline retail price inflation of 4.8% exceeded average earnings growth of 4.5% over the year to March 2007. This fall in real earnings contrasts with real earnings growth of 1.6% during the previous year. (Average earnings rose by 4.0% over the year to March 2006 against headline retail price inflation of 2.4%). (Source: ONS)

Rising food prices are also reducing the income households have available for housing

Annual food price inflation increased from 5.6% in March to 6.0% in April, its highest rate for almost six years. Food prices have risen sharply worldwide recently as an expanding biofuels industry, climate change and the growing prosperity of countries such as China and India have combined to push up the prices of agricultural commodities. These upward pressures on food prices are likely to persist.

Commenting, Martin Ellis, chief economist, said: "House prices increased by 0.3% in May. This is the smallest increase so far this year and the third successive easing in the monthly growth rate. The recent slowing in monthly house price inflation, together with further evidence of moderation in housing market activity, suggests that the interest rate rises since last summer are having an impact on the market.

Higher interest rates, the negative trend in real earnings growth and rising food prices are likely to bite increasingly on householders' finances over the coming months, curbing housing demand. House price inflation is expected to moderate as a result. The market, however, remains supported by solid economic foundations which, together with supply shortages, will continue to support prices."