Another Nail In The Coffin For UK House Prices

Press release: 12 Jan 2007

"The combination of surging asking prices and rising interest rates makes for a most perilous start to 2007 for the UK housing market" asserts the latest Asking Price Index report from Home.co.uk. The comment relates to the Bank of England's third interest rate rise in the last six months, announced yesterday, pushing up the cost of mortgages for UK homebuyers. This latest move from the 'Old Lady of Threadneedle Street' comes at a time when asking prices are rising at an annualised rate of 8.4%, the fastest growth for over 2 years.

According to this Index, from the creators of the UK's most comprehensive online property search, prices of property on the open market registered strong gains in the second half of 2006 and have continued to rise into Jan 2007, seemingly unfettered by the previous two rate rises. However, the report candidly points out that, "Each turn of the screw takes the UK housing market closer to the brink and in a market hamstrung by affordability constraints there is very little room to manoeuvre."

To underline the seriousness of the situation, the report draws a parallel with recent events on the other side of the pond, "The current US housing slump is a direct consequence of a series of interest rate hikes in 2005, by their central bank, in an attempt to curb inflation. A similar chain of events appears to be now unfolding in the UK."

Why Are Prices Now Rising?

The supply of credit is a fundamental driver for house prices and 2006 saw the beginning of the end for responsible lending. Leading mortgage lenders extended their maximum lending multiples to 5x or even 6x income and '125% mortgages' (95% secured and 30% unsecured debt) were made available to those desperate to get on the housing ladder or trade up.

Couple this with riskier lending with an overall increase in affordability of around 15% since 2004, as previously reported by Home.co.uk in September (taking into account increases in average earnings), and the buyers, many of whom are first-time buyers, have come flooding back. Consequently, property transaction rates soared towards the end of 2006. It is this increase in buyer activity that has driven house prices even higher.

The most worrying trend is that many of the homebuyers currently taking up these more risky mortgage offer are cash strapped first-time buyers. Such investors must be mindful they do not 'over commit' themselves by shouldering too much debt, as better re-mortgaging deals may not be around when they come to the end of the initial lower-rate term.

Potential buyers with insubstantial deposits should understand that the Bank of England, as directed by the Monetary Policy Committee, are duty bound to continue raising interest rates until the Consumer Price Index (CPI) falls back to the target rate of 2.0%. Despite the first two interest hikes in 2006 the CPI figure now stands at a record 2.7%, suggesting that yesterdays rise will be just one of several more 'turns of the screw' that may be needed to bring inflation under control.

The Home.co.uk Asking Price Index reports may be viewed at https://www.home.co.uk/asking_price_index/

Notes for Editors

Over the last 28 years, Home.co.uk has become established as a dynamic, innovative and ethical service. By providing the UK's most comprehensive Property Search and Estate Agents directory coupled with detailed House Price analysis, Home.co.uk delivers the real power of the Internet to inform and empower estate agents, homebuyers, renters, landlords and sellers in across the UK.