Spectre of interest rate rise threatens house price recovery

The typical price of a house in England and Wales stood at £175,518 in February 2011 compared to £177,554 in February 2010. House prices are now lower than at any time since December 2009.

The UK housing market suffered another setback at the beginning of 2011. Data from the Council of Mortgage Lenders showed a 26% fall in the number of new home loans in January as compared with December. Bad weather and seasonal variation were widely blamed for the fall, which saw the lowest level of new advances since the height of the financial crisis in 2008.

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However, the CML data did include some encouraging signs, including a rise in the average loan-to-value offered to first-time buyers, which suggests the supply of credit is becoming less constrained. At the same time, the Monetary Policy Committee is becoming increasingly split about the future direction of interest rates as inflation runs at double the Bank of England’s target.

For the first time so far in 2011, the number of house price and asking price indices tracked by the Chesterton Humberts House Price Poll of Polls showing monthly price increases outweighs the number of indices showing monthly price falls.

Nevertheless, taking into account the timeliness, lag and accuracy of the various indices, the Poll of Polls shows that the average price of a residential property in England and Wales still declined by -0.5% over the month to February. This was a slightly worse decline compared to the fall seen over the month to January.

Robert Bartlett, Chesterton Humberts CEO, said: "Although the London market has experienced a month-on-month price decrease of -0.3%, this is not unusual for this time of year and there are signs we may experience a spring bounce over the next few months.

"Currently, prime and near-prime areas such as Mayfair and Fulham have high levels of activity, with increases in both asking and agreed prices, the results of which will be translated into the spring and summer house price surveys.

"Prices in London are still 2.2% higher than they were a year earlier thanks to an impressive performance for most of 2010.

"With most regions of the UK experiencing a year on year decrease on prices, and reports on the impending rise in interest rates, the market outside of London remains more challenging. The level of demand remains low, making it unlikely prices will rise anytime soon. Stock shortages have now spread from the South and South West to the Midlands, but buyers will not pay over the odds meaning overvalued properties are sticking and stalling the market. Once vendors are prepared to price properties realistically, the market there will begin to pick up.

"There is much talk in the market about a possible rise in interest rates. However, most inflationary factors currently affecting the UK are beyond the scope of the Bank of England to resolve and therefore I would challenge that a rise in the UK base rate would have little impact on curbing inflation. However, a rate rise is bound to have a negative impact on the fragile economic recovery and would seriously impact consumer spending, the retail sector, the housing market and cause Sterling to rise thus affecting exports, the one area of our economy which is currently driving growth."

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2 thoughts on “Spectre of interest rate rise threatens house price recovery

  1. Ellen

    Far too much is made of the housing market, which is a parasite on the back of our society. Speculating on property is not something which should be helped by the government or anyone else. Leave it to market forces to find its true value – which is probably a lot less than current prices being asked for by your average estate agent. There is not one good reason to try to push house prices higher other than to pander to the greed of homeowners.

  2. Sonya Brice

    I agree they should prices should fall, they were overinflated anyhow before the property boom stopped. The average age of a first time buyer is likely to 37. That is ridiculous. I was a first time buyer at 21 in the 1980’s. The rapid escalation of prices have priced people out of the market, and the bubble on house prices had to burst at some point because this is unsustainable for first time buyers and having to find a deposit.

    The average fall of house prices in the past year to date is 11.09% across the whole of Britain. I think this is a good thing because the prices need to be more realistic. And with people being squeezed with inflation, increasing fuel prices, energy costs and pay freezes, something has to give. Buyers don’t have the money they used to and will expect more value from property prices.

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