Summary

House prices fell 0.3% in the UK in May, according to Nationwide, but this national average continues to hide wide regional variation. The fall negates the modest rise we saw last month and takes average house prices back to their level at the end December 2017. This rate of growth is slightly lower than our forecast for a 1% average price increase this year.

This marginal price growth is likely to continue, with a majority of surveyors reporting a fall in house prices for the first time since September 2012 in the April RICS survey. Most continue to report falling numbers of new buyer enquiries and new instructions to sell, and while the number of surveyors reporting rising numbers has increased, they remain a minority. Early data from the Land Registry indicates a dip in transactions during Q1 2018 compared to the same period last year. This view is supported by a 9% fall in the number of mortgage approvals and is in line with our forecasts which anticipated 2018 to be a year of low activity.

In February the Term Funding Scheme (TFS) closed, cutting off a source of cheap financing for banks. The TFS provided £127bn to all major banks following the vote to leave the EU and £59bn remains held by the banks. It was designed to encourage banks to pass on the base rate cut to lenders and its withdrawal coincides with an expectation of base rate rises this year. These influences are reflected in mortgage interest rates, with the two year fixed rate (at 75% LTV) now at its highest level since July 2016. Increases in mortgage payments will put more pressure on many households, but recent falls in inflation have led to real wage rises for the first time in a year. The GFK survey reported a two point rise in consumer confidence, indicating that there has been an improvement for many over the past month, although the measure remains in negative territory.