Articles > House Prices Grow

Figures from the Nationwide building society for the performance of the housing market during August show that the rise in interest rates made by the Bank of England have not yet done anything to dampen the enthusiasm of UK home buyers, with the cost of the average property rising by 0.8 percent.

With the growth in August matching that of the previous month, the annual rate of inflation has been pushed to its highest rate since April of 2005, standing as it is at 6.6 percent.

News of this continued strong growth in the housing sector has led to increased speculation of a further rate rise before the end of the year, taking the base rate of interest up to five percent. This would be needed if house price inflation continues unabated, however as the last rate rise only came into effect at the beginning of August, it may well be a couple of months until we see the full consequence of this on the market.

House price growth is something of a double-edged sword, for homeowners who are not looking to move it is good news, as it increases their ‘paper wealth’ by increasing the value of their assets. On the other hand, for those looking to move to a larger home, or for first time buyers in particular, it is a bad thing as it pushes property further from affordability.

The thing with house price rises is that while on paper it makes homeowners richer, in real terms it makes very little difference, except for those who have bought property as an investment. The reason for this is that house prices tend to go up largely the same amount across the various regions, so owners cannot cash in on the increase by selling and moving on, as the house they buy will have seen a similar increase.

Higher house prices do however have a large bearing on inflation, more costly houses mean larger mortgages that require a greater percentage of the buyer’s monthly earnings to cover the repayments. This in turn means less spare cash to be taken to the high street, resulting in less consumer spending and therefore lower inflation in the consumer price index (CPI).

With the CPI currently running above its two percent target, the Bank is having to take steps to bring it back in line, and if the figures seen for August carry through into September despite the recent rate rise, then we could well be in for another interest rate hike in the not to distant future.