Have house prices fallen? Yes, but don't panic

FRIDAY morning started with the media announcing a fall in Edinburgh house prices and, as a result, the good people of Edinburgh were starting to worry about the meaning of this for their most important asset - their home.

So have house prices fallen? Well, they have, but, before you start to worry, read on.

Based on properties sold through the ESPC, there was a slight drop in house prices. The average property in the Edinburgh area was selling for 229,046 between May and July. Between August to September, the same property could be yours for 217,442.

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However, any picture can be painted with statistics, which is why it is better to consider a complete picture.

ESPC markets around 90 per cent of all properties sold in Edinburgh. This gives us the detail on the changing market.

Your first question might be, is this drop the start of something new or a regular pattern of the property market? Well, it is in the sense that a drop in prices in the second half of the year is a consistent feature of the Edinburgh market.

So let's look at what started the worry by looking at the May-to-July and August-to-September comparisons - prices fell by 4.69 per cent in 2006 and 6.04 per cent in 2005 in these periods.

The reason for this drop is that there is more demand to buy property during the first half of the year.

This pushes up the selling prices as buyers compete. As the market cools so do the selling prices.

So you might then be looking for an accurate picture. I believe the only way to avoid the fluctuations is to consider year-on-year data rather than considering one three-month window against another.

So let's compare like with like. When one looks at property prices on a year-on-year basis, the picture is much healthier.

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The year-on-year increase experienced in May-to-June 2006 compared to the previous year was 11.95 per cent. The same period this year compared to last showed prices rising by 11.86 per cent.

Despite the market being quieter in August-to-October, house prices have still increased year-on-year, with 2006 seeing a rise of 13.56 per cent compared to the previous year and again rising by a further 11.58 per cent in 2007.

So no sign of falling house prices with this perspective.

The third question is, these are significant growth rates, can they continue? This is the big question and there are many possible answers.

The ESPC perspective is that in the coming year we expect house prices to continue to rise, but at lower rates, potentially between three and five per cent.

So my advice then is to consider the longer term and avoid the worry - in the vast majority of cases, your house is worth more now than at this time last year.

• Ron Smith is the chief executive of ESPC (UK) Limited