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Bank of England holds interest rates as house prices soar

  • 18/11/2002
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The widely-anticipated decrease in the Bank of England Base Rate (BBR) last week did not happen. Th...

The widely-anticipated decrease in the Bank of England Base Rate (BBR) last week did not happen. This has been attributed in part to the latest Halifax House Price Index, which found house prices are still rising. It is generally thought this report had a significant impact on the Monetary Policy Committee’s (MPC) decision to leave rates unaltered.

The report stated UK house prices rose by a seasonally adjusted 4.7% in October. This is the biggest recorded increase in house prices and represents an annual increase of 30.6%. Halifax tried to dampen the impact of these figures by noting: ‘The fall in house prices last year following 11 September is estimated to be responsible for nearly two-thirds of the increase in the annual rate of house price inflation to 30.6% in October from 24.2% in September.’

Martin Ellis, group chief economist at Halifax, said: ‘Last month’s record rise in prices underlines the continuing strength of the UK housing market as the low level of interest rates and falling unemployment drives up demand. Affordability remains good as well. Mortgage payments represent 15% of gross earnings for a typical new mortgage borrower, one of the lowest percentages since 1984, and significantly below the long run average of 22%. In addition, there remains a shortage of properties available for sale, which is adding to the upward pressure on prices.’

He added: ‘A 7.8% increase in the price paid by existing owner-occupiers moving home was mainly responsible for last month’s rise while the prices paid by first-time buyers increased by a relatively modest 1.5%. Buyers are put off buying in the most expensive areas and are increasingly looking to nearby areas for better value.’

However, there are some in the industry who believe the case for not cutting the base rate is being overblown.

Douglas McWilliams, chief executive at The Centre for Economics and Business Research, said: ‘Our data and that from the Land Registry, suggests HBOS’ data is exaggerating the increase in house prices, though we have always made clear we expected housing affordability at low interest rates would mean, when combined with lack of supply and rising household numbers, that house prices would rise faster than average earnings for some time.’

The latest Land Registry figures show a less spectacular rise in the average price of property nationally. According to its latest figures, an average house price in England and Wales from July to September 2002 is £146,150, an 18% increase on the £123,856 for the same period last year.

It was generally considered likely that the rate would drop as the Federal Reserve board had dropped the US base rate by 0.25% only a few days before. This was on the back of weaker than expected economic growth for the quarter and an indication that US consumer confidence in October had fallen to its lowest level for nine years. In the US, as in the UK, economic recovery is pinned on consumer spending.

Shortly before the MPC made its decision, Laurence Sanders, economist at Bristol & West, explained the effect the US rate change could have on the UK.

He said: ‘Sterling might appreciate significantly if the MPC left rates unchanged following a US rate reduction. Such an appreciation would have an adverse effect on UK manufacturing, at a time when demand in our US and eurozone export markets appears to be slowing.’

McWilliams agreed: ‘The MPC is caught in a bind. It is aware that if it cuts interest rates, it risks pouring petrol on the flames of house price inflation. As we pointed out recently, rising house prices have boosted consumers spending this year by allowing customers to increase their mortgages to withdraw equity. We estimate this will have financed 5.9% of consumer spending this year, up from 3.8% in 2001.’

The remit of the MPC is simply to keep inflation between 1.5% and 3.5%. If UK interest rates are not reduced, there is a chance that the rate of inflation will fall outside the MPC’s target range. Many still expect a BBR cut to come sooner rather than later.

Ray Boulger, senior technical manager at Charcol, said: ‘House price inflation is beginning to show signs of cooling off, with the Nationwide reporting a slowdown for October. This is likely to be in the forefront of the Bank of England’s mind, which has relied heavily on the housing market to revive the economy. We predict this house price inflation slowdown will continue in the new year, and a base rate cut could be helpful in preventing the increase in house prices from slowing down too quickly.’

Nevertheless, Halifax remains upbeat about house price inflation. Ellis said: ‘The low level of mortgage payments in relation to earnings means that new borrowers are not over-stretching themselves. There also appears to be little prospect of either a substantial rise in interest rates, or unemployment over the next year. House prices are therefore expected to continue increasing although at a slower pace than in recent months.’


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