The annual rate of house price inflation picked up for the third consecutive month in August according to Nationwide.

The building society’s monthy housing report found that house prices are now 6.6% higher than at this time last year - the fastest annual rate of growth since
April 2005.

Nationwide has described the house market for August as “firm” with prices increasing by 0.8%. The typical house in the UK now costs £167,721. This is £10,412 higher than August 2005 - the equivalent of a rise of almost £30 per day.

High immigration and supply issues are supporting the market with good demand, especially from the investment sector. The buy-to-let market is still healthy with record levels of lending in the first half of the year and high tenant demand expected to support it in the future.

Home Office data confirmed immigration is significantly higher than expectations and this, along with increasing numbers of households priced out of buying their own property, is maintaining tenant demand. Combined with the relatively slow response of the supply of housing in the UK, this will help to support the housing market in the face of higher interest rates.

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Main Points
- House prices increased by 0.8% in August
- The annual rate of growth accelerated to 6.6%
- Rate rises will signal caution
- Unlikely to lead to a repeat of the 2004 slowdown
- Average cost of a home: £167,721

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Interest Rate issues
But, it is interest rates, or rather the recent rise in rates, that is looming over the market. Fionnuala Earley, Nationwide’s Group Economist believes that while they are an important factor,the market is different from 2003 - 2004. “The rise in rates will undoubtedly have sent a cautionary signal into the market, but inflationary pressures in the economy now are less certain than in the previous cycle. There is a stark difference in the tone of the MPC minutes.In 2004 there was a much clearer inflationary risk relating to household consumption and borrowing. All rises were the result of unanimous votes of nine (rather than the current seven) members. While the MPC is now clearly in hawkish mode, uncertainties about oil prices and the amount of slack in the economy mean that the inflation outlook is less definite and fewer rate rises are expected. Even though we expect rates to increase to 5% - 25 basis points above the peak of the last cycle - current economic conditions, especially in the labour market, are still supportive. This means that rate rises are likely to only be a catalyst to the slowing we had already expected, rather than fostering a repeat of the 2004 slowdown.”

But the higher rates will hit confidence somewhat. Ms Earley concluded: “Higher interest rates will worsen affordability and make getting on the housing ladder more difficult. The signal sent by the increase will also add to caution and help to slow demand across all sectors of the market. Higher overall levels of debt could also mean that people are more sensitive to interest rate rises. However, as 50% of the stock of mortgages is on a fixed rate, only a limited portion of existing homeowners will be affected by the rate rise.

For those on variable rates a 50 basis point increase in the mortgage rate will, on average, add £37 to their monthly mortgage bill4. While not insignificant, it seems unlikely, in the absence of a problem with the labour market, that this will lead to major difficulties with mortgage payments, and thus forced sales, which would undermine confidence in the housing market more fundamentally.”