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House price inflation to hit 5% in 2007

Bank of Ireland’s housing market forecast predicts that the average house price inflation will be 5% in 2007.

The Bank of Ireland also says the Monetary Policy’s Commitee’s base rate rise partly reflects housing market strength.

It says mortgage lending remains robust despite recent base rate rise and says the strength of mortgage demand was probably a significant factor in the MPCs decision to raise base rate.

The bank perceives the MPC move as touch on the brakes, designed to cool the housing market.

It expects a further base rate increase and expects mortgage applications to fall back to circa 27bn per month gross and 8bn per month net.

Allowing for business agreed before the base rate was announced, the bank expect mortgage advances to ease marginally in 2007 to 100bn net and 330bn gross.

This figure is nearly 10% below our previous forecast, and is based on a peak on base rate of 5.50%.

Average house price inflation is currently running at around 10% per annum on both the Halifax and Nationwide Indexes.

This level is clearly unsustainable and was probably a key factor behind the recent MPC decision.

If, as expected, the MPC decides to tighten monetary policy by a further notch, the next 0.25% base rate increase is likely to be in March just ahead of the peak spring buying season.

It would also be ahead of the expected Budget date the MPC tends not to move base rate at the meeting following the Budget since any move could be interpreted as a reflection on the governments fiscal policy.

Any future increase in base rate will place particular pressure on the first-time buyer market.

It says the government should seriously consider raising the threshold for stamp duty significantly to support first-time buyers.

The bank expects to see a very gradual downturn in the rate of house price inflation this year.

The impact of monetary tightening will be partly balanced by the underlying strength of the UK economy.

It’s forecast average of UK house price inflation in 2007 is 5%. This average will mask significant variations in regional and area prices.

On a longer-term view, our forecast of average house price inflation for 2008 to 2010 is 5-6% per annum.

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