UK house prices set to soar even higher

The latest news that energy and food prices are dropping rapidly in the UK will put pressure on the Bank of England’s monetary policy committee (MPC) to hold off any increase in rates the next time it meets. This is likely to push house prices further through the roof.

Homebuyers desperate to get into the UK’s overheated housing market shrugged off the last rate increase in August. With prices in areas of London still seeing rises of up to 11 percent per annum, buyers are getting desperate and panicking into hugely leveraged debt.

Since the Bank of England was given autonomous powers to control the rate it has been tasked to limit the inflation rate to 2 percent. The Consumer Prices Index (CPI) does not measure the costs of housing, which in all parts of the country are still rising faster than the CPI rate – in some cases by a factor of  four times.

As housing mortgages increasingly take on a larger part of family income and expenditure this is not factored into the whole CPI equation. Worse, in some cases the rapid growth of the ‘buy to let’ fuelled by lower rates and free access to highly leveraged lending has meant that the rental components that are measured are, perversely, lower.

With news this week from the ONS that input prices (that is food and Energy) have fallen 1.2 percent between July and August this year, the biggest fall since December 2004 the likelihood is that inflationary pressures will ease. The expected inflation rate, published today, is expected to remain at 2.4 percent for August.

All this is good news for the economy, but bad news for house buyers, as it means that prices are likely to continue increasing.

As previously we think that both the Bank of England and the government need to consider the real inflation rate and include housing in the considerations at the next MPC meeting. Falling energy and commodity prices are good for the economy as a whole, but a continuation of the housing bubble certainly will only be storing trouble for later.

Perhaps as Mr Blair moves into his final year in office he has no intention of facing up to the mounting debt and housing bubble crisis. We suspect that he’ll be more interested in leaving us with the words ‘you never had it so good’ and leave the imminent personal debt crisis to mar the next Prime Minister, whoever that may be.