Oct
31
Figures released today by the Nationwide Building Society show house prices rose by 2% in October, taking the average house price to £131,947, an increase of 16.1% year on year and is said to have been fuelled by a resurgence London house price growth.
The increase is the largest for 14 months and has led to Nationwide increasing their estimate for the year from 13% to 15%.
Earlier this week, Hometrack, the property website, announced that house prices rose 0.4% in October pushing the average price up to £145,900. More importantly, the sale price as a percentage of the asking price rose for the fourth month in a row to 95.1%, suggesting that buyers are finding it harder to negotiate deals.
According to Hometrack’s economist John Wrigglesworth, “The housing market is heading for new heights. There is no doubt that the year is finishing with new house price highs”.
But an increase in house price inflation is a double edged sword for homeowners with mortgages. Whilst it certainly increases the equity they have in their homes, it also makes an increase in the base rate by the Bank of England Monetary Policy Committee (MPC) next week even more likely.
At the October meeting earlier this month, rates were only kept at 3.5% due to the casting vote of the Governor, Mervyn King. But recently he has been making hawkish statements signalling that he sees rates increasing. The result being that a quarter percentage point (25 basis point) increase is expected at the conclusion of the monthly two day meeting next Thursday.
The money markets are currently pricing in a 50 basis point increase in the base rate by April next year, taking the base rate to 4%. After that they expect the rate to hit 5% by 2005.
Whether this will dampen enthusiasm in the housing market is a subject hotly debated with economists split into two camps. Whilst some are forecasting a housing market slump more devastating than that witnessed in the late 80s and early 90s, others feel that even a 5% base rate will only marginally impact on the ever skyward trend of house prices.
Whichever camp you fall into, there is one constant. Higher interest rates mean it is going to be more expensive to service your debt.
