• House prices fell by 2.5% in May

• Prices are 4.4% lower than this time last year, but remain 5% higher than 2 years ago

• Falling house prices combined with higher inflation makes MPC decision more difficult still

• Borrowers are better placed to weather the storm than in the 1990s

“The pace of house price falls accelerated in May as more weak economic news added to the gathering momentum of negative sentiment about the housing market. House prices fell by 2.5% during the month, the largest recorded monthly fall in the history of the Nationwide monthly index1. At seven months, this is also the ongest consecutive period of monthly falls since 1992. Prices have fallen 4.4% since this time last year, the biggest annual fall in house prices since December 1992 when prices were falling at an annual rate of 6.3%. The price of a typical house is now £173,583, £8,000 less than this time last year. However, the strength of house price growth up until last year means that prices are still 5% higher than two years ago and 10% higher than three years ago.

“Problems in credit markets have clearly been the trigger for changing fortunes in the housing market and while it is never wise to place too much weight on one data point, the apparent speed of the adjustment may lead the MPC to look more closely at the balance of risks to inflation in the medium term. Stronger than expected inflation appears to have shattered hopes of an early cut in the Bank Rate in June, but more downbeat economic and housing market data could lead more MPC members to join David Blanchflower in voting for pre-emptive cuts. The decision will be very difficult with new highs in oil prices, but as higher prices of essential items squeeze consumer spending power and housing market weakness weighs down on confidence, the balance of risks to inflation in the medium term could shift enough to lead the MPC to cut rates sooner than the markets currently expect.

“The housing market has not been immune from weaker economic sentiment. Three important data series reported record lows in April. The Bank of England reported a 11% monthly drop in house purchase approvals in March to reach a seasonally adjusted 64,000 - the lowest since records began in 1993. RICS estate agents reported the most widespread regional falls in house prices in the history of their series. However, we estimate the size of the average fall for the UK implied by the RICS data was around 2% over the last three months - consistent with figures from Nationwide. House price expectations also fell into negative territory, as the Nationwide Consumer Confidence Index for April reported that consumers expect prices to fall by 1.7% over the next six months.

“A further fall in house prices in May was not unexpected, and for most of those not wishing to move house orborrow money secured on it, the fall in value of their home is likely to be of limited concern in the short term."

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