Annual house price decline at 12.4 per cent says Halifax Index

This decline means that the house price to earning ratio, which is a key measure of affordability, now stands at 5.02 (July 2008), down from its peak in July 2007 when it stood at 5.84. However with the long term average standing at about 4.0 it may signal a further decline in prices, especially as the cheap borrowing that led the index up had now dried up. By my calculations that means that prices would need to fall by about 20% from the July 2008 5.02 to get us back to the long term trend, but of course other factors such as demand may have moved the multiple upwards, in which case the downside would be smaller.

Commenting on the house price index movement, Martin Ellis, chief economist, said:"House prices declined by 1.3% in September. The overall price decrease in the three months to September was very similar to that in the previous quarter, indicating that the trend rate of decline may be beginning to stabilise.

The ongoing pressures on householders' income, combined with the reduction in the availability of mortgage finance, however, mean that market conditions will remain challenging."

Market report

Negative real earnings growth, high house prices relative to incomes and reduced mortgage availability constrain housing demand

Average earnings have increased at an insufficient pace to match the rise in retail prices over the past year, rising by 3.5% compared with a 5.0% increase in the Retail Price Index. At the same time as this decline in real earnings, significant rises in fuel and food prices - 25% and 13% higher respectively during the last 12 months - have reduced the amount of discretionary income available to households.

The resulting pinch on incomes, combined with the high level of average house prices in relation to earnings, has made it difficult for potential house purchasers to enter the market. The decline in credit availability is a further constraint on buyers. These significant pressures on housing demand are causing house prices and activity to fall.

Housing market activity declines further but some signs of stabilising

The number of mortgages approved to finance house purchase was virtually unchanged in August at a seasonally adjusted 32,000 compared to 33,000 in July. Nonetheless, approvals were 70% lower than in August 2007. (Source: Bank of England)

Completed property sales in August 2008 were 47% lower than in August 2007. Newly agreed sales - i.e. not yet completed - continued to fall, but the pace of decline stabilised. (Source: RICS)

Mortgage rate paid by new borrowers has risen ...

The average mortgage rate paid by new borrowers has risen by 22 basis points over the past year from 5.88% in August 2007 to 6.10% in August 2008 despite a 75 basis points cut in Bank rate over the period. This increase reflects the significant rise in lenders' funding costs since the beginning of the financial markets crisis.

... but the rate paid by existing borrowers has fallen

The average mortgage rate paid by all borrowers (i.e. the average rate on outstanding mortgage loans), however, has fallen slightly over the same period, from 5.91% in August 2007 to 5.83% in August 2008 as those on existing tracker rates have benefited from the Bank of England rate cuts. (Source: Bank of England)

Interest rate cut will help many borrowers

The recent weakening in the economy has alleviated the MPC's inflationary concerns over the coming months sufficiently to provide the scope for yesterday's cut in Bank rate. Lower interest rates will help mortgage borrowers faced with increasing pressures on their finances and provide a valuable support to the housing market.