House Prices Feel The Heat

After three consecutive months of minor rises, asking prices in England and Wales were knocked back by 0.6%, according to the latest Asking Price Index report from Home.co.uk. Such price cutting behaviour underlines the highly price sensitive nature of the current housing market. Buyer affordability constraints are again creating sufficient downward pressure on prices to force sellers to discount their asking prices.

Bad news for sellers perhaps, but the changing nature of the market offers a glimmer of hope to aspirant first time buyers. For several years now, many thousands have been unable to get on the first rung of the property ladder and could only look on as prices soared out of reach. Finally the tide is turning, albeit slowly, as house prices in most regions are now moving in the right direction for those that represent the 'life-blood' of the market, nominally and in real terms.

Indeed, asking price inflation, in the formerly strong northern regions, is entering negative territory. The report from Home.co.uk reveals that, over the past six months, asking prices in the North, North West and Yorkshire & Humber were hit by falls of 2.8%, 1.9% and 2.1%, respectively. Greater London faired no better, registering a 2.7% drop over the same period. Even Scottish asking prices are under pressure, registering the first significant drop (3.4%) in the last eighteen months, suggesting the long run of rising house prices has peaked north of the border.

Whilst eight out of England's nine regions showed a fall, over the last six months, asking prices moved ahead in the South West and Wales by 1.6% and 4.3% respectively. These regions' prices are likely to be buoyed by the seasonal holiday home market, underpinned by the traditional influx of summer visitors.

Perhaps the most alarming news, from Home.co.uk, is that asking prices have fallen even further behind the rate of inflation. In real terms, asking prices are going backwards at an annual rate of 4.7% relative to the Consumer Price Index (CPI). Historically, periods of high inflation spell disaster for house prices, since the main weapon in inflation fire fighting is interest rate rises.

On August 3rd we saw the Bank of England take its first step towards combating inflation, with a hike of 0.25%, raising the base rate to 4.75%. The CPI figure currently stands at 2.5%, which is 0.5% above the Bank's target. Such a small rate rise, on its own, is unlikely to contain the strong inflationary pressures of rising energy costs and excess money supply. Therefore, a further rise appears likely later in the year.

"We expect the government to use all the means at its disposal to fight inflation. Interest rates are just one tool in the macro-economist's toolbox. However, as one of the greatest drivers for inflation is a rising M4 (broad money), the Bank of England may have to use their most effective instrument and that is interest rates," commented Doug Shephard, Business Development Director for Home.co.uk, in a recent interview.

Climbing interest rates always increase downward pressure on house prices and the effect of this recent hike is likely to be observed in a further softening of asking prices across the UK. "The full fallout of this rate rise will not be observable until we gauge the market's response in September and October," added Doug Shephard.

Notes for Editors

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