House prices continue to decline

Commenting on the figures, Martin Ellis, chief economist, said: "House prices declined by 1.8% in August. A solid labour market, low interest rates and a shortage of new houses continue to support the market. The pressure on householders' income, together with the reduction in the availability of mortgage finance due to the global financial markets crisis, is resulting in both lower property prices and activity levels.

This week's announcement on stamp duty is a welcome development and will benefit a significant number of homebuyers, particularly outside the south east of England. Market conditions, however, will remain challenging."

The key points of the survey this month were:

House prices fell by 1.8% in August. This was similar to the previous two months – June (-1.9%) and July (-1.7%) - but lower than in March (-2.5%) and May (-2.5%). ·

House prices in August were 10.9% lower on an annual basis. The UK average price has returned to the level it was at in February 2006.

A solid employment market and low interest rates underpin the housing market. Our research shows that the labour market is the key driver of the housing market. The number of people in employment increased by 20,000 over the three months to June compared with the previous quarter and by 384,000 over the past year to a record 29.56 million.

House price to earnings ratio is declining. The house price to average earnings ratio – a key affordability measure – has fallen from a peak of 5.84 in July 2007 to 5.13 in June 2008. We expect a further decline as prices continue to soften.

The temporary raising of the initial stamp duty threshold from £125,000 to £175,000 should reduce the stamp duty burden for a significant number of homebuyers, especially outside the south east of England. Almost a quarter of a million (230,000) homebuyers in England and Wales would not have paid stamp duty over the past year if the threshold had been £175,000 rather than £125,000.

Significant regional differences in stamp duty burden. Increasing the lowest stamp duty threshold will benefit buyers in all regions, but will have a more pronounced impact outside the south east. For example, only 12% of total sales were below £175,000 in London over the past year compared to 75% in the North.