Three interest rate rises since August have cooled the housing market sufficiently to rein in runaway house price inflation but the rate of increases in house prices still remains too high for comfort, the latest FT house price index shows.

Prices in London continue to rise much faster than other regions, although large variations within the capital show that the really rapid gains are limited to the most salubrious districts, where demand is boosted by City bonuses and international buyers.

With house price inflation remaining higher than wage inflation, the Bank of England considers the market remains unsustainably strong. Unless price rises moderate, pressure will intensify on the Monetary Policy Committee to tighten the screw still further on borrowers.

The annual rate of house price inflation was 7.6 per cent in February, according to the FT house price index, a rate of increase that has remained almost constant since September last year, when it climbed to 7.3 per cent.

Peter Williams, chairman of Acadametrics, the consultancy which produces the FT index, said that both the monthly and annual increases in February indicated that house price inflation had “reached a plateau”.

“We have yet to see the full impact of interest rate increases on the market because with many borrowers remortgaging and using fixed rate mortgages, the effect takes time to work through the market,” he added.

The likely direction of the national housing market depends on whether the London market cools to become more similar to other regional markets, or whether recent gains in the capital ripple out to the rest of the country raising national house price inflation.

While markets in East Anglia, the East Midlands and the West Midlands appear to have cooled in the three months between October and January, with price rises below an annualised 4 per cent rate, the markets in London and the South West have strengthened. The prices of property sold and recorded by the Land Registry in these two areas accelerated to an annualised rate of more than 12 per cent over the same period.

Mr Williams’ hunch was that the current London effect would not spread more widely. “If London trends were to ripple out to other regions we would expect to see higher increases in the South East, but for the moment at least at 0.5 per cent on a monthly basis this is not the case,” he said.

This month’s FT house price index includes detailed breakdowns for London boroughs for the first time. House prices within the capital have grown much faster in expensive areas than in poorer areas. Land Registry figures, for example, show that Kensington and Chelsea has experienced house price inflation of 18.1 per cent in the year to January compared with 0.4 per cent in Newham.

When presenting the quarterly Inflation Report last month, Mervyn King, the Bank of England governor, told journalists that he hoped the three interest rate rate rises imposed since last August would help to bring house price inflation down.

“In terms of bringing inflation back to the 2 per cent target, one would like to see house price inflation moderate somewhat from double digit levels to which it almost had risen, so any softening of that would, I think, be a welcome development,” he said.

The extension of the FT index to include details of London boroughs has led to larger revisions of the main index than usual. The annual rate of house price inflation in England and Wales for January was revised up from 6.9 per cent last month to 7.5 per cent this month.

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