House price boom shows signs of slowing with 1.9% July rise

Evidence is mounting that the housing market boom has peaked, Halifax bank said yesterday as its latest survey showed prices were rising at their fastest level for 13 years.

The price of the average home rose 1.9 per cent in July, the second month of slowdown and less than half the pace of the record peak of 4.3 per cent growth in May. But the increase was still the third largest this year, and boosted annual house price inflation for the year to the end of July to 20.8 per cent – its highest level since June 1989.

Gary Styles, head of group economics for the bank, said prices were still rising strongly, fuelled by low mortgage rates and a shortage of property. But he said that anecdotal evidence of lower levels of enquiries and transactions pointed to a slowdown in activity. "There are two stories – prices and activity. Our estate agents are saying that activity has slowed," he said.

Last month the Royal Institution of Chartered Surveyors reported a marked fall in new enquiries. And figures from the Inland Revenue showed a drop of 7,000 in the number of completed transactions between May and June to 139,000.

"Whilst confirming a buoyant marketplace, indicators of housing market activity also show some early signs of slowing," Mr Styles said.

"Without drawing direct comparisons with the late 1980s, back then we saw a fall in transactions numbers before we saw prices fall."

There are also signs that despite the lowest mortgage rates for half a century, homebuyers are being forced to overstretch themselves. Halifax figures showed the typical house now cost more than four times the average annual salary, for the first time since 1990. In London the ratio was 5.8 and in the wider South-east more than six compared with a peak of 7.5 times earnings in 1988.

Mr Styles said: "It has picked up steadily since the back end of last year as prices rose and we started to see earnings growth moderate."

Saxon Brettell, a director at Cambridge Econometrics, agreed the market might be turning but said it was too early to judge if it was cooling. "What is significant is the volume of transactions, and while they are still pretty buoyant, there is some sign that transactions are dropping," he said.

"It may be a sign that we are seeing some turn in the market, but it's still early days, and it does look as if we are still in the middle of a speculative boom."

Meanwhile Rics yesterday warned homebuyers to "take care" when trying to enter the housing market, saying current low borrowing rates were unlikely to be sustained.

The institution hiked its forecast for price growth this year from 6 per cent to 19 per cent, saying low levels of interest rates and a strong buy-to-let market would keep prices rising. But it said it expected the market to slow to an annual increase of 7 per cent in 2003 as interest rates eventually rise.

On the issue of affordability it pointed out that while the ratio of prices to earnings was high, the ratio between prices and the income declared by the individual purchaser was lower.