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Average house prices outside London are a fraction below their 2007 peak. (Kevin Coombs/REUTERS)
Average house prices outside London are a fraction below their 2007 peak. (Kevin Coombs/REUTERS)

U.K. housing market strengthens further, defies cooling measures Add to ...

Britain’s house prices rose at their fastest rate in nine years and London prices showed their biggest jump in a generation, data showed on Wednesday, as measures to curb mortgage lending have yet to have an impact.

Stricter checks on borrowers’ ability to pay back mortgages were introduced in April and have weighed on the approval of home loans. Some fear these could become unaffordable when interest rates eventually rise from a record low.

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But house prices picked up pace in June, growing by almost 12 per cent on the year, helping to fuel construction. Separate data on Wednesday showed activity in that sector grew in June at its fastest annual pace in four months.

Further measures announced last week to cool lending and reduce the risk of a bubble were expected to have minimal impact, and analysts said homes were still not being built fast enough to contain price rises.

The BoE has opted for macroprudential measures to tackle the strength in the housing market and says interest rate rises from the 0.5 per cent reached in March, 2009, are only a last resort for fear that a premature move could derail the recovery.

But economists said the data only strengthened the case for a rate hike this year, after a strong manufacturing release this week also pointed to robust second-quarter growth, and sterling hit a fresh near 6-year high against the U.S. dollar.

“The strong growth of both sectors should help drive a further robust increase in gross domestic product of a similar magnitude to the 0.7-to-0.8 per cent increase seen in previous quarters,” said Chris Williamson, chief economist at Markit, which produced the manufacturing and construction surveys.

“Such persistent strong growth adds to the chance of interest rates starting to rise later this year.”

House prices rose 1.0 per cent in June after a 0.7-per-cent rise in May, taking the annual rate of increase to 11.8 per cent – the biggest since January, 2005, according to mortgage lender Nationwide.

More strikingly, in the three months to June, London house prices were 25.8 per cent higher than a year earlier – an annual increase not seen since 1987.

“The price of a typical property in London reached the £400,000 ($681,000) mark for the first time, with prices in the capital now around 30 per cent above their 2007 highs and more than twice the level prevailing in the rest of the U.K.,” said Nationwide’s chief economist Robert Gardner.

Average house prices outside London are a fraction below their 2007 peak, Gardner said, while transaction levels nationally are still well below their historic average.

BOE’S CONUNDRUM

The figures underscore the challenge facing the Bank of England as it tries to stop a regional housing boom from destabilizing the rest of the economy.

The bank has said it does not target house prices directly but wants to prevent lending from getting out of control.

To that end, it said last week that no more than 15 per cent of new mortgages could be to people seeking to borrow over 4.5 times their annual income.

Around 10 per cent of loans fall into this category nationally, rising to roughly 20 per cent in London.

Nationwide said this cap and new tighter affordability checks were unlikely to slow house price growth in the short run, but that the prospect of higher interest rates might.

Speculation that the BoE will raise interest rates later this year or early in 2015 was already pushing up longer-term market interest rates, Gardner said.

“If this is sustained, it is likely to feed through to mortgage rates, which would also help to prevent buyer demand rising too strongly.”

But Nationwide said the underlying pressure on prices came from a lack of new homes being built – a view shared by the BoE.

Markit’s survey showed construction activity picked up in June but analysts said it was not enough to tackle Britain’s long-term supply shortage problem.

The monthly Markit/CIPS purchasing managers’ index (PMI) for the construction sector rose to 62.6 in June from 60.0 in May, its highest level since February. The survey showed the fastest pace in hiring in the sector since 1997.

“Construction is growing rapidly because house prices are rising rapidly and housing demand is growing quickly but housebuilding will not be strong enough to slow house price inflation,” said Rob Wood, chief U.K. economist at Berenberg.

“The U.K. needs to build at least a quarter of a million houses a year and possibly even more just to keep up with demand and it is nowhere near doing that right now.”

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