House prices leap in May - interest rate rise inevitable?

House prices grew by an average of almost £3,500 in May, pushing the annual rate of inflation in the property market above 20 per cent for the first time since last June, HBOS said yesterday.

These figures have reignited speculation that the Bank of England will raise interest rates when it announces its June verdict tomorrow. The BoE has lifted rates three times since last November - yet the housing market has shown no signs of slowing.

HBOS said the typical home changed hands for £157,849 last month. That was a 20.4 per cent increase over the previous 12 months - up from 19.1 per cent in the year to April.

The property market had not broken the totemic 20 per cent inflation barrier since last summer - shortly before the BoE chopped its base rate to 3.5 per cent. The cost of borrowing has since risen to 4.25 per cent, yet HBOS said house prices soared 2.2 per cent between April and May alone.

The average home commanded an extra £3,405 on the month, the Edinburgh bank said. Its figures closely mirrored those from building society Nationwide, which measured a increase of 1.9 per cent in May, or 19.5 per cent in the past year.

HBOS group chief economist Martin Ellis said the bank has been forced to revise its full-year inflation forecast. It has torn up its prediction that house prices will rise 8 per cent, and will unveil a new forecast shortly.

"It's safe to say it [the new forecast] will be in the double digits," Ellis said. He declined to disclose a figure, but a number north of 12 per cent is considered likely.

Ellis repeated the bank's thoughts that house prices will begin to slow by the end of the year. He conceded the bank has wrongly predicted a slowdown on several previous occasions, but insisted that rising interest rates will soon begin to take their toll on the market.

"Admittedly, people didn't take that much notice of the first couple of rises after last November," he said. "And by the time the May increase came through, people had already sorted out the sales we recorded in this latest survey.

"But now that we've had an extra three-quarter of a per cent on the base rate - and because people know that more increases are on the way - we should see the [rate] effect begin to work its way through."

While rates are rising, the number of new houses being built continues to fall. Private sector house completions in England and Wales in the first quarter of 2004 were down 3 per cent on the year.

But Ellis insisted this tightening of supply, which has helped push prices up, will be outweighed by the effect on demand of rising interest rates. "I don’t believe the supply effect will be powerful enough to offset the fall in demand that we're expecting," he said. "The shortage of new houses will probably support prices to an extent, but the interest rate effect will be stronger."


9th June 2004

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