House price inflation 1.1% in June

The housing market hit back in June with house price inflation increasing 1.1% – the fastest monthly increase in 2007.

The pick up during the month brings the annual rate of house price inflation to 11.1%, its highest level since January 2005 and more than twice as fast as the pace of growth at this time last year.

Nationwide predicts the rate of growth will slow in second half of year, and is forecasting 5% to 8% growth in 2007.

Fionnuala Earley, chief economist at Nationwide, says: “While June’s heavy rain dampened the first days of Wimbledon, it did little to check the vigour of the housing market as house price inflation bounced back during the month.”

The price of a typical house is now £184,070, more than £18,000 higher than this time last year, which is the equivalent of a rise of more than £50 per day.

Earley says: “The resilience of the housing market will be another component to add to the base rate rise camp’s argument.

“Earlier house price data had shown the start of a slowing in the market, but while too much emphasis should not be placed on one month’s figures, the fact that today’s data shows a bit of a bounce will add to the upside risks being counted up at the Bank of England.

“While we expected interest rates to increase to 5.75% in August, this news, together with the revelation that rates remained on hold by only the narrowest of margins in June, will set the stage for that rate rise to move forward to July and for the risk of a rise to 6% to increase significantly.”

But she adds: “While upside risks to rates are clear, there are factors which may mean that the interest rate response will still be measured.

“The most important is the squeeze on consumers’ incomes. Real earnings growth is negative and household disposable income growth is negligible, both of which will limit consumers’ spending.

“Furthermore, as mentioned in the Monetary Policy Committee minutes, higher household debt levels may have increased the impact of interest rate changes, so if the full effect of earlier rate rises has yet to fully work through, the brakes are still being applied even before the rise expected in July.”

Nationwide believes that until there is categorical evidence that inflationary pressures are subsiding, the MPC will remain vigilant and the risks to rates will remain on the upside.

It says this will keep financial market rates higher.

Earley says: “The hawks on the MPC further believe that the rate of economic growth needs to come back below trend to be able to achieve the inflation target.

“Higher interest rates will add to the squeeze on demand in the housing market in the short term helping to reduce the rate of growth in the second half of this year.

“Lower economic growth would also keep a lid on demand in the medium term.

“In spite of the bounce in June’s data we still believe that the underlying trend in house price growth is softening.

“House purchase approvals fell back to 107,000 in April, their lowest level for a year, and while there may be a small rebound in May other data at the very start of the chain suggests that the trend is down.

“Estate agents are continuing to show a fall in the number of new buyer enquiries and house builders are also registering falls in the numbers of site visitors.

“Furthermore, in the rental market, yields for new entrants to the buy-to-let market are being squeezed significantly.

“This will slow the growth of this sector and also take some pressure off house price growth.”