House prices increased by 1.8% in April, in line with the average rise during the preceding four months, and confirming the continuing strength of the housing market, reports the Halifax today.

Sound fundamentals underpin the housing market the, bank says. The economy is growing at a healthy pace resulting in record high levels of employment and further falls in unemployment. Interest rates, whilst on an upward trend with a high probability of another rise this week, remain historically low.

According to Halifax research, the household sector balance sheet is in very good shape. The total value of private sector housing assets was equivalent to 3.2 times the value of total household debt at the end of 2003 - a much healthier position than both 5 and 10 years ago when the ratio was 2.7 times.

This improvement in the wealth to debt ratio is largely attributable to rising house prices, which have caused the value of housing assets to double over the past 5 years to £3 trillion. The rise in housing wealth has offset the fall in financial wealth since 1999 boosting overall household wealth.

The low level of interest rates also means that debt-servicing costs have remained relatively modest despite the record levels of debt. Interest payments on all household debt account for 8% of annual household disposable income, significantly below the peak of 15% in 1990.

Commenting on the sound condition of the housing market, Martin Ellis, Chief Economist, said: “The fundamentals will remain supportive during the remainder of 2004 with little prospect of either a turnaround in the labour market or a sharp rise in interest rates.”

“Nevertheless, the increasing difficulties faced by potential first-time buyers in entering the market, and the impact of the expected imminent rise in interest rates together with the increases already seen in recent months, should result in a gradual easing in house price inflation during the second half of the year."

Base rates likely to rise further but will remain historically low

This week's decision on interest rates promises to be finely balanced, comments Ellis. “The high level of the pound (which will help to curb inflationary pressures by reducing import prices), and the low current level of inflation should prevent the need for aggressive rate rises this year and we continue to expect base rates to end the year at around 4.5%. Whilst the level of rates will remain historically low, the cumulative effect of the rise in interest rates from a low of 3.5% last autumn should curb housing demand.”

The number of first-time buyers remains low

The latest figures from the Council of Mortgage Lenders show a marginal rise in first time buyers as a proportion of homebuyers from 28% in the final quarter of 2003 to 29% in the first quarter of 2004. The total number of first time buyers was, however, 2% lower than in the first quarter of last year, reflecting the difficulties increasing numbers of potential first time buyers are facing in getting onto the housing ladder.

Mortgage approvals figures provide no sign of an imminent housing market slowdown

The number of mortgages approved for house purchase remains at high levels with the number of loans 24% higher during the first quarter of 2004 than in the same period last year, according to the latest Bank of England figures. These figures show that there is no sign of an imminent easing in the housing market.