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Winter fails to cool UK house prices

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A comprehensive overview of all the major UK house prices indices found that property prices continued their strong growth in clear defiance of the climate of rising interest rates.

Back in August, many experts had predicted that the shock interest rate rise, the first for two years, would put the brakes on the housing market. Nothing could be further from the truth as prices continued to rise throughout the late summer months.

Some analysts then predicted that the rate rise would have a delayed effect on house prices, but in October, the Assetz Price Watch showed that the average growth rate for properties in the UK was 8.7 per cent over the last 12 months, a 0.4 per cent increase on the previous month and a 4.4 per cent increase since the beginning of the year.

The average house in the UK is now fast-approaching the £200,000 barrier, in October a typical British house would cost a buyer £195,267, a rise of £116 from September.

Such growth has led the property investment firm to stand by its original prediction that property prices would rise, on average, by seven per cent over the course of this year and it still believes that the eight to ten per cent growth estimated for 2007 and 2008 is a realistic possibility, even allowing for another interest rate rise in January.

Stuart Law, managing director of Assetz, believes that the strong growth that the UK is now experiencing is led by a chronic deficit in supply rather than the price of borrowing.

He explained: "The Bank of England is perhaps looking too closely at house price rises as part of the inflationary mix, still believing rises to be interest-rate led.

"In fact, the growing demand for homes, driven by high immigration and the forthcoming expansion of the EU to include such countries as Bulgaria, Poland and Romania, will be the main source of house price growth over the next few years, rather than low interest rates which primarily drove price rises up until 2005."

The property investment specialists argue that the monetary policy committee's policy of raising interest rates to combat inflation could actually have the reverse effect. By creating a climate where consumers, already faced with record energy prices, are forced to pay more for their borrowed capital, the Bank could well prompt employees to demand greater wage increases, which would eventually feed through the money cycle to higher inflation.

Mr Law concluded that potential property investors should not be put off by such a climate, as "inflationary fears by economists do not match the reality of the situation" and so the Bank of England may not raise rates again in the new year, as has been widely predicted.

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