House prices ‘starting to cool’

The housing market is beginning to show the first effects of rising interest rates, according to the Nationwide building society.

House prices rose by only 0.3% in January, the slowest rate for eight months. This cut the annual rate of house price inflation to 9.3%, compared to December’s figure of 10.5%.

Demand is beginning to fall as a result of rising interest rates and high prices according to the Nationwide. This view is backed up by figures from the Bank of England, which showed a sudden drop in the number of new mortgages approved during December.

In January, the BoE lifted interest rates to 5.25%. This was the third quarter-point increase since August, and surprised many housing analysts.

“Only time will tell how much the surprise decision will affect sentiment in the housing market, but even before January’s rate rise there were already very early signs of cooling,” said Fionnuala Earley, Nationwide’s chief economist.

The Nationwide also highlighted a recent fall in new buyer enquiries, a slowdown in recently agreed sales and an increase in the time properties stay on the market as signs the housing market are cooling.

Other commentators expect the UK property market to stay buoyant throughout the year. A shortage of new houses and increases in bonuses for City workers are predicted to keep prices high.

The main risk to house prices was a sudden drop in confidence following the recent interest rate rises, according to the Nationwide.

“However, the more likely outcome is that the market will remain fairly stable but slow a bit more quickly than we initially expected,” said Ms Earley.

“This would bring our expectation of house price growth in 2007 into the lower end of our 5-8% forecast.”

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