House price rises are slowing | 05.06.2007

The rate of house price growth slowed in May as the property market showed further signs of cooling following the recent spate of interest rate rises According to Nationwide, the UK’s largest building society, the average price of a house rose 0.5% during the month to £181,584, which is 10.3% higher than the same month in 2006. The Bank of England has raised interest rates twice this year to the current rate of 5.5%, which has helped slow the market down. But Nationwide said just the threat of further interest rate rises is deterring potential buyers.

Chief economist Fionnuala Earley said: ‘Higher interest rates, with the threat of more on the horizon, should signal caution to those thinking about stretching themselves to get a foot on the ladder. ‘This is not only because of the level of debt in the short term, but also because, in a low inflation world, the real value of the debt is not eroded as quickly. As a result, the burden of servicing that debt remains heavier for much longer.’

Further rises

Nationwide said there is a strong chance that there will be one further rate rise this year because there are still growing inflationary pressures. But it predicted a price slowdown rather than a crash. ‘Higher interest rates clearly present risks to the housing market, but providing the economy, and particularly the labour market, remain in good shape, we should still be able to expect a measured cooling.’

This was a view mirrored by Howard Archer, economist at City research firm Global Insight. He said: ‘The Nationwide data is consistent with our expectation that house prices will lose buoyancy gradually over the coming months as demand is increasingly pressurized by the rising affordability pressures stemming from higher interest rates, modest real disposable income growth and elevated house prices.

Source: Michael Clarke, Daily Mail