November 9, 2006 8:48 am

House price inflation accelerates

UK house prices rose in October at their fastest pace in seven months but the market looks set to cool over the winter, Halifax said on Thursday.

In its latest survey of the residential property market, the mortgage lender said the average price of a home was £184,593 last month, an increase of 1.7 per cent from September.

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This pushed up annual house price inflation from 8 per cent to 8.6 per cent, well above the 5 per cent growth that both the Halifax and its rival lender Nationwide forecast for the whole of 2006.

Although the increase in prices for October was above City expectations, markets reacted little to the news, with sterling barely moving as traders calculated the survey only cemented expectations of an interest rate rise later on Thursday.

Although house prices are not directly targeted by the Bank of England in its quest to contain inflation, the central bank’s rate setting body has made it clear it is wary of an over-exuberant property market, partly because this can encourage further consumption.

The Bank will also be aware that an extended run of above average house price gains may increase the chances of a subsequent crash and that such an outcome can complicate monetary policymaking.

Indeed, just last month Mervyn King, governor of the Bank of England, said it was “difficult to understand why house prices relative to conventional earnings are as high as they are.”

Such concerns about affordability were expressed by Martin Ellis, Halifax chief economist on Thursday.

Acknowledging that sound economic fundamentals and a paucity of house supply was buoying the market, Mr Ellis nevertheless said he was seeing signs of a “weakening in activity at earlier stages of the house buying process suggesting that house price inflation may soon begin to slow.”

“Significantly higher utility bills and the increase in mortgage rates over recent months – both in fixed and variable rate products – are expected to constrain housing demand, causing the annual rate of house price inflation to ease over the coming months.”

Howard Archer at Global Insight noted that the current pace of house price inflation could add to pressure for the Bank to consider further rate rises next year but that “ultimately, we believe affordability constraints will cause house prices to moderate, although the process looks like taking longer than we have been expecting.”

The FT House Price Index, which aims to be among the most comprehensive and timely indicator of prices in England and Wales, showed growth of 6.1 per cent in the year to September. New FTHPI data for October are released on Friday.

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