U.K. house prices rose for the second month running in August, a survey by Lloyds Banking Group Plc's Halifax division showed Wednesday. However, analysts still expect further weakening in prices going forward, but they ruled out a sharp correction.
House prices recorded a modest 0.2% monthly growth compared to a 0.7% increase in July. Prior to the gain in July, prices fell every month since March. Economists had forecast a 0.5% decline for July.
"Prices are now at a very similar level to that at the end of last year," said Halifax housing economist Martin Ellis.
"Activity has also been largely static since the start of the year."
In August, house prices were 4.6% higher than the same month last year. The price growth was, however, slower than 4.9% in July. Economists had forecast a 4.4% increase. The annual rate has been easing since May, when it peaked at 6.9%.
"The improved economy, strengthening labor market and low interest rates are all supporting housing demand," Ellis said. "We expect that UK house prices will remain static overall in 2010."
The average house price was GBP 167,953 during August which is 9% above its April 2009 low and 16% below its August 2007 peak. The latest data suggested that market is broadly stable with house price inflation having cooled since last year when supply shortages helped to push up prices.
However, these figures are in contrast with the Nationwide survey, which indicated a drop in house prices due to increased imbalance between supply and demand in the U.K. housing market. According to the building society, house prices fell 0.9% compared to July, faster than the 0.5% decrease in the previous month, with the average price at just over GBP 166,500.
While a sharp correction in house prices is unlikely, prices may soften by around 3% by the end of this year, said Howard Archer, chief economist at IHS Global Insight. Furthermore, as the fiscal squeeze will increasingly kicks in, hurting people's pockets and leading to serious job losses in the public sector, a further drop around 5% in house prices looks highly possible in 2011 and the drop could well be steeper still, he said.
"Much will depend on mortgage availability and the amount of houses coming on to the market as well as how well the economy holds up and therefore, house prices will be some 10% lower by end-2011," according to Archer.
The British economy grew at its fastest pace since 2001 in the second quarter boosted by the construction activity, with the gross domestic product rising 1.2% sequentially. However, the tough deficit cutting measures of the government are widely expected to weaken demand, thus increasing the risks of an economic setback.
"With the supply imbalances eroding and the full impact of the government austerity measures still to be felt, house price falls are likely to become more common as the year progresses," Paul Diggle, property economist at Capital Economics observed. "Lack of available credit, weak buyer demand and negative house price expectations among other things are yet to pass through to sustained house price falls."
Slow growth in residential construction in August dragged down the pace of expansion in U.K's construction sector, a survey by Markit Economics and the Chartered Institute of Purchasing and Supply construction showed earlier this month. Similar surveys for the manufacturing and services sectors have also pointed to sharp slow-down in activity, raising concerns of a double-dip recession.
The Bank of England is due to announce its monetary policy decision on Thursday and is widely expected to leave the key policy rate unchanged at 0.5%. Last month, the central bank said a total of 48,722 mortgages were approved during July, up from 48,562 in June.
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