Commenting on the latest House Price Index from the Halifax that shows house prices only rising by 0.4 percent in May, Howard Archer, Chief Economic Advisor to the EY ITEM Club, said:
"A modest rise of 0.4% month-on-month in May does little to dilute the impression of a struggling housing market.
"The May rise followed flat prices over the previous three months. Consequently, annual house price inflation on the Halifax measure fell to 3.3% in the three months to May, which was a four-year low. Furthermore, house prices were down 0.2% in the three months to May compared to the three months to February.
"This lacklustre data follows on from the Nationwide reporting house prices falling 0.2% month-on-month in May. Annual house price inflation on the Nationwide's measure was at a 35-month low of 2.1% in May. This weakness in house prices comes amid softer activity with the Bank of England reporting that mortgage approvals for house prices slowed to a seven -month low in April and the Royal Institution of Chartered Surveyors' survey showing a dip in agreed sales and buyer enquires.
"The fundamentals for house buyers are likely to deteriorate further over the coming months with consumers' purchasing power squeezed further by a combination of higher inflation and muted earnings growth. It is also possible that the labour market could increasingly falter despite its current resilience. Additionally, housing market activity is likely to be hampered by softer consumer confidence and a reduced willingness to engage in major transactions.
"Housing market activity and prices are could also come under pressure from stretched house price to earnings ratios. According to the Halifax, the house price to earnings ratio reached 5.81 in December (the highest level since August 2007) and was still as high as 5.75 in May. This is well above the long-term (1983-2017) average of 4.19.
"There are however some factors that should put a floor under house prices. In particular, the downside for house prices is likely to be limited markedly by a shortage of houses for sale. Additionally, very low mortgage interest rates should remain helpful to the housing market for some time to come."