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UK house prices up 1.7% on lower interest rates

February 5
2:57 AM 2016

The house prices in the UK were up for the consecutive second month in January 2016. The inflation in the property market is continuously moving up as the demand pressure persists. The average cost of a house in the UK was up 1.7 percent in January. 

Lower interest rates and encouraging job growth rate are propelling demand in the UK property market. The demand is even surpassing the new supply in the housing sector. Bank of England said mortgage approvals were up in December. This further indicates sustained buoyancy in the real estate sector. 

Bloomberg reports that the average cost of a home increased by 1.7 percent as against the market expectation of one percent. The house price rose from £212,430 ($311,000) in December 2015, according to data by Halifax. However, the house price rise was 10.4 percent in the previous corresponding month. 

The surge in affordability of consumers is driving demand for the housing sector. This will result in price rise, which is likely to outpace wage growth. After this, this will slowdown the demand and decline in price rise as well. The demand and supply gap will continue to propel price rise until it become more constrained. 

The house price increase in December was revised up to two percent from 1.7 percent. The three-month measure of home prices during the past three months was up 2.2 percent, when compared with the previous period. The average house price in the UK is £212,430, according to Yahoo Finance. Analysts opine that the housing prices continue to be squeezed up by mismatch in demand and supply situation in the UK. 

Samuel Tombs at Pantheon Macroeconomics sees no constraints to soaring prices in the near term. "Furthermore, it is still very possible that interest rates could start edging up late on in 2016. With wage growth set to strengthen in response to the decline in labor market slack," he said.

Adding to this, interest payments account for only small fraction of home owners' income. The supply shortages are unlikely to be resolved overnight. At the same time, price gains look set to remain rapid in 2016. The prices in December were up 1.7 percent and on rolling three-month annualized basis, it was 9.5 percent, according to a report by MNI.

Martin Ellis, an economist at Halifax, said: "The imbalance between supply and demand continues to exert significant upward pressure on house prices. This situation looks set to persist over the coming months."

The Financial Policy Committee has additional powers to cool down the UK's housing market. The UK Government can raise banks' capital requirements for mortgage lending. This will tighten the liquidity in the property market. However, the main reason for the overheating in the UK housing market is lower interest rate regime.

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