Assetz® News - Strong October amid fears of slowdown

Strong October amid fears of slowdown

10th November 2006 |

On the day that the Bank of England announced that it was raising interest rates to their highest level for five years, a new survey shows that house prices continued to boom last month.

The standardised average house price now stands at £184,593 after a 1.7 per cent increase in October pushing up the annual growth to 8.6 per cent, according to Halifax's monthly house price index.

This follows very strong growth in the third quarter with prices rising by 1.2 per cent and 1.3 per cent in August and September respectively.

But while the number of loans approved for housing purchase increased by five per cent in September, following signs of a levelling off in activity over the summer months, there is growing evidence of a slowdown in housing market activity.

The latest survey from the Royal Institution of Chartered Surveyors (Rics) reported that there was virtually no change in sales between the second and third quarters this year, while growth in new buyer enquirers slowed sharply in September with respect to the previous month.

Furthermore, the House Builders' Federation has also reported a drop in the number of prospective buyers looking at new homes for the third time in four months.

Although some experts, such as Rics chief economist Milan Khatri, believe that the reason for such a dampening of the market is the climate of rising interest rates there is a growing school of thought which points to other factors as the root cause of growth.

Pre-empting the monetary policy committee's decision, Stuart Law, managing director of Assetz, said that the Bank "must be careful not to mistake the cause of house price rises over the next two years as being interest-rate led".

He explained that a chronic deficit in supply will determine house prices in the short-term future.

Meanwhile, Martin Ellis, Halifax's chief economist, put the predicted easing of house prices down to affordability issues.

"Significantly higher utility bills and the increase in mortgage rates over recent months – both in fixed and variable rate products – are expected to constrain housing demand, causing the annual rate of house price inflation to ease over the coming months," he said.

These predictions of a slowdown clearly do have substantial evidence behind them, but it must be remembered that the same arguments were put forward when rates rose for the first time in two years back in August and since then, growth has been exceptionally strong.

Recent figures from the Office of National Statistics show that the UK economy continued to grow at above its long-term average pace of 0.6 per cent a quarter this year with gross domestic product increasing by 0.7 per cent for the first successive quarter.

Coupled with record levels of unemployment and a shortage of supply, these strong fundamentals will ensure that the housing market remains healthy as we move into the new year.