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House prices fall as higher rates bite

The Bank of England’s decision to raise interest rates earlier this month is already having an impact on the housing market, according to the latest survey of asking prices.

Rightmove, the property website, reported that prices are down 1.6 per cent in August indicating that the mini boom in house prices could already be over.

The strength of the housing market this year has surprised many. Affordability is stretched, with many would-be first-time buyers being priced out of the market and rising energy bills and council taxes taking their toll on those who already own a property.

Analysts had expected property prices to rise by around 3 per cent over the course of the year but in the 12 months to July, the average asking price was up 10.6 per cent according to Rightmove. Nationwide and Council of Mortgage Lenders have also revised their annual predictions upwards.

Many economists expected the rate of growth to slow in the autumn, but Rightmove’s data suggests this is already happening. The Rightmove index showed that prices have dropped by 1.6 per cent this month, having risen 2.9 per cent the previous month.

Miles Shipside at Rightmove said: "Prices have passed their peak for 2006. The record price levels seen so far this year were driven by the south of the country. With that market cooling, and signals from the Bank of England that interest rates may move up again, sellers may have to reduce their price expectations."

The apparent speed with which this month’s rate rise seems to have affected property prices will cause nervousness about the possibility of further increases later in the year. Some economists think the Bank of England will put rates up again in November and some believe there could be a further quarter point rise next year, which would take base rate to 5.25 per cent. If this happens the housing market could stagnate.

Richard Donnell at Hometrack, another property website, said: "The market is very sensitive. If we get two more rises it won’t cause a collapse but activity levels will drop off even more."

Mr Shipside believes the Bank of England should now resist more interest rate hikes: "Activity in the property market virtually stopped dead after two successive rate rises in 2004 and took a year to recover. Prices are now cooling off and require no further intervention from the Bank of England. Lower prices help buyer affordability but rises in interest rates damage it again. It’s a careful balance, but with more realism from sellers we could be entering a period of stability again."

http://business.timesonline.co.uk/article/0,,9553-2322642,00.html