UK house prices jump 11.7% in year to July
The average home in London now costs more than £500,000 after the fastest rise in house prices in seven years, while inflation in the rest of the economy is more subdued than at any time since the financial crisis.
Two sets of official data laid bare Britain’s diverging price trends on Tuesday: house prices surged 11.7 per cent in the year to July while the annual inflation rate – which does not include house prices – fell from 1.6 per cent in July to 1.5 per cent in August.
The housing market’s rapid recovery in the past year, led by the booming capital, pushed the average London house price to £514,000, official statisticians said. The average UK house price was £272,000.
Martin Beck, economic adviser to the Item Club, a forecaster, said the housing market “continues to present a complication for the Bank of England’s Monetary Policy Committee in what is otherwise a fairly benign environment for monetary policy”.
Seven of the nine MPC members have cited Britain’s weak inflation rate, together with anaemic wage growth, as a reason not to rush to raise interest rates from their record low of 0.5 per cent.
Rather than use interest rates to tackle the housing market, the BoE has used new “macroprudential” tools to try to stop rising prices from derailing the economic recovery, such as setting limits on mortgage lending.
Josh Miller, an economist at the Royal Institution of Chartered Surveyors, said he thought this BoE strategy was starting to work, despite signs to the contrary in the ONS data. Rics, which gathers data about activity at the earliest stages of buying a house, tends to see patterns six to 12 months sooner than they show up in the ONS figures. Its data suggest annual house price inflation will slow next year and then halt.
“You’ve had the Bank of England essentially engineer a change in public opinion over the last six months or so, with various verbal interventions which have served to concentrate minds,” he said. Rics’ data suggest London house prices might well be a little lower in 12 months’ time.
Meanwhile, the UK’s weak inflation rate should give the MPC “greater leeway to keep interest rates on hold for longer”, said Chris Williamson, an economist at data company Markit.
Low inflation is a phenomenon affecting many industrialised countries in the wake of the financial crisis, including the US and the eurozone.
The main contributor to the slight fall in inflation last month was the price of food and non-alcoholic drinks, which fell 0.2 per cent between July and August but rose 0.5 per cent over the same period a year ago. Supermarkets are embroiled in a vicious price war that has helped to push down food prices by the highest level since 2002.
Furniture and household equipment prices also played a part, the ONS said, rising at a slower pace than last year.
But Alan Clarke, an economist at Scotia Bank, pointed out that “core inflation” in the UK, which strips out volatile energy and food prices, rose from 1.8 per cent in July to 1.9 per cent in August, much closer to the BoE’s target. “This is far from deflation,” he said. “Rather it is lower food and energy that are holding back inflation.”
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