UK house prices rise 1.2% in December

House prices increased by 1.2% in December, taking the annual rate to 10.5%, according to the Nationwide Building Society.

Commenting on the figures Fionnuala Earley, Nationwide's Group Economist, said: “Both housing market and weather forecasters were surprised by the warm climate this year. The temperate weather is likely to have played only a minor role, but the housing market clearly warmed up during the year. House prices increased three and a half times faster than last year and returned to double digits for the first time since February 2005. December’s increase of 1.2% brought the annual growth rate up to 10.5%, way above the widespread expectation this time last year that annual house price growth would be in low single digits. The price of a typical house increased by the equivalent of £45 per day in 2006 - three and a half times faster than the £12.50 per day in 2005 - bringing the price of a typical house up to £173,746.

Prices to remain buoyant in the short term

“There are still few signs that the rate of house price growth will moderate in the very short term. Evidence from estate agents continues to show that supply conditions are tight with fewer sellers coming to market. The stock to sales ratio – a good leading indicator of house prices – has continued to increase suggesting a few more months of firm price growth. However, we expect worsening affordability and recent interest rate hikes to affect the levels of activity in the market in the coming months. This will feed into a slower rate of house price growth in the second half of next year. The number of estate agents reporting an increase in new buyer enquiries fell back sharply in November, and while this is a more volatile indicator of house purchase approvals, it does lend some support to the view that we will soon see the start of some weakening in demand.

… but double-digit rise could pose a risk to interest rates

“Until now the strengthening housing market has not been a big feature of Monetary Policy Committee discussions on interest rates, but the latest set of minutes clearly identify this as an upside risk. Whether the breaching of the double digit threshold will increase the MPC’s concern depends on whether or not it believes that there is a greater risk that higher house prices will feed into consumer spending and fuel inflation. However, given that slow growth in household consumption was cited as a downside risk to inflation, there is unlikely to be any swift change in emphasis resulting from the house price numbers alone.

“The labour market is the biggest risk to interest rates, but the evidence of some slack in the labour market and increasing use of migrant labour along with relatively weak consumer confidence should keep a lid on wage inflation. For now we remain with our view that rates have peaked at 5%.

Market expected to remain firm in 2007

“The rate of house price growth in 2007 is expected to be relatively robust at between 5% and 8%. Momentum gathered in 2006 will flow into the early part of 2007, and this will be supported by a buoyant economy, stable interest rates and a continuing shortage of housing supply. We can therefore expect to see a few months of double-digit annual house price inflation in the first half of the year. However, increasingly poor affordability, the impact of higher mortgage rates and the likelihood that fewer parents will be willing or able to help their children out will cause the rate of house price growth to move back into single digits in the latter part of the year”