Commercial Insurance Articles
UK house prices: on the edge?
09 Aug 2007
House prices in Britain are showing a determination to continue their strong growth in the face of higher interest rates.
But while the market is showing resilience in some areas of the country such as Northern Ireland and in the south-east and London, overall house price inflation is slowing.
At the end of last month, Nationwide building society reported the yearly house price increase had slipped below ten per cent - the smallest rise for more than a year.
According to Nationwide chief economist Fionnuala Earley, the effect of five quick-fire base rate increases has started to bite into the housing market at last.
"The sharp slowdown in July's house price numbers could show that potential homebuyers are thinking twice about overstretching themselves in a higher interest rate environment," Ms Earley said.
This is something that buyers and sellers will have to get used to however, as it seems more rate rises are on the cards.
Increasing oil prices and stubbornly high food prices may be enough to keep inflation above the government's two per cent target, despite the interest rate rises specifically aiming to cut inflation, according to Jonathan Loynes and Paul Dales of Capital Economics.
"The recent further increase in oil prices and the potential stickiness of food prices suggest that previous expectations of a sharp fall in UK consumer price inflation over the coming months may now be disappointed," they said in a statement. "This could add to the upside risks to interest rates."
It has now been suggested that a further 0.5 per cent will have to be added to the Bank of England base rate over the next few months, if inflation is to be curbed.
However, the fallout from this move would likely reduce activity in the property and mortgage markets which could lead to a price drop in some less in demand areas.
A drop in mortgage lending has already been shown by Building Societies Association to be occurring as the value of mortgage approvals in June amounted to £3.98 billion, down markedly from £4.24 billion the month before.
"It seems the impact of successive interest rate rises is now being felt and is affecting affordability," said Brian Morris at the BSA.
When this is coupled with concern over the financial risks of sub-prime mortgages following the crash in America, the property market looks somewhat assailed on all sides.
However, it may just be a case of weathering the storm rather than hanging on a knife edge as mortgage lending approvals are still fairly strong in historical terms and boom areas such as London are carrying on their price inflation more or less unabated.
And the Halifax Bank of Scotland (HBOS) group sees potential for solid house price growth surviving the tough market conditions as it updated its yearly forecast of growth to six per cent following stronger-than-expected performance.
Offering some hope for property investors and traders, the lender said: "Housing market fundamentals are sound. Shortage of properties for sale - both new and old - will also support house prices. Recent official household projections suggest the shortfall in new homes being built is more acute than previously estimated."
High demand will see Northern Irish property leap 23 per cent this year, according to the HBOS, which is still sizeable even if much reduced on last year's 53 per cent explosion in prices.
