Interest rate hold leaves housing market uncertain
Released on = August 24, 2007, 10:55 am
Press Release Author = Jimwatson
Industry = Real Estate
Press Release Summary = The recent evidence in the housing market has appeared somewhat contradictory to say the least when it comes to prices. Look at the latest house price figures from Nationwide and the rate of inflation for July was just 0.1 per cent, the lowest in 15 months.
Press Release Body = The recent evidence in the housing market has appeared somewhat contradictory to say the least when it comes to prices. Look at the latest house price figures from Nationwide and the rate of inflation for July was just 0.1 per cent, the lowest in 15 months. Similarly, today\'s Assetz House Price Watch showed the average house growing by just £72 in July, while this week the Royal Institute of Chartered Surveyors produced figures showing first-time buyer enquiries to be at a three-year low. All these suggested higher interest rates were starting to bite.
In contrast, the Department for Communities and Local Government figures for June showed prices rising by around £1,000 a week, the average house increasing in cost from just over £210,000 to £214,222, while at the same time annual house price inflation jumped from May\'s 10.8 per cent to 12.1 per cent in June.
Overall, however, the consensus is that the market is slowing down. As Chris Cummings, director general of the Association of Mortgage Intermediaries (AMI) told Citywire: \"So far this seems to be the beginnings of an orderly deceleration in the market.\"
Mr Cummings was speaking in response to figures included in the AMI\'s quarterly economic bulletin by Alliance & Leicester, which said a 1990-style housing market crash would not happen unless interest rates soared to 8.25 per cent. While this was down from the 8.5 per cent the bank quoted in April, the figure is still some way off the current 5.75 per cent.
However, Mr Cummings said: \"The concern is that the higher interest rates seemingly needed elsewhere in the economy may put excessive pressure on the housing market.\"
Of course, the Bank of England\'s monetary policy committee\'s (MPC) primary remit is to maintain Consumer Prices Index (CPI) inflation as close to the government\'s target rate of two per cent as possible. Earlier this year the CPI rate rose above three per cent, obliging Bank of England governor to write an open letter to the chancellor explaining what the MPC planned to do about it. The end result has been more rate rises to keep inflation down. If the housing market is slowing down as a result, this is an incidental consequence of MPC rate policy.
While nobody has predicted a rise to 8.25 per cent, most analysts were tipping a six per cent rise until this week, not least as the Bank\'s quarterly inflation report hinted that this would be necessary to keep CPI falling towards two per cent. Then the picture changed markedly. CPI unexpectedly fell to 1.9 per cent and the minutes of the MPC August meeting showed a unanimous vote to hold rates plus a statement that \"most members had no firm view on whether rates would need to rise further\".
The implication of the last statement, David Page of Investec told the BBC, was that the MPC was locked into \"wait-and-see mode\" for the foreseeable future. One might deduce from this that the \"orderly deceleration\" Chris Cummings spoke of will be allowed to continue.
Not all agree. Writing for the Motley Fool today, David Stevenson argued that in the light of higher than expected growth in retail sales in July, the question was open again, meaning that \"the risk of higher interest rates has not yet gone away\".
Given that so many statistics on house prices or the economy in general have contradicted each other, or how the quarterly inflation report gave one message that appeared to be disproved a week later, or indeed how the CPI rate confounded expectations (the Bloomberg analyst\'s survey median was 2.3 per cent), it could be unwise to try to predict the future with any confidence.
However, if the only certainty is continued uncertainty, this may be the very factor which maintains the wait-and-see position that the MPC has adopted, thus preventing any further rate rises in the coming months.
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