Published February 27, 2007

UK house-price inflation reaches three-year high

(LONDON) UK house-price inflation reached the fastest pace in more than three years this month, driven by a shortage of homes, Hometrack Ltd said.

The cost of a home in England and Wales, based on a survey of 3,500 real estate agents, rose 6.4 per cent from a year earlier, the most since June 2003, the London-based research group said yesterday.

Prices rose 0.7 per cent on the month, the most since May 2004, to an average of &pound172,000 (S$516,791).

The property market has now absorbed three interest rate increases since August and the threat that borrowing costs may rise even further.

The Bank of England predicts higher prices of assets such as homes will encourage growth in consumer spending, which more than doubled in the fourth quarter.

'Despite the January rate rise, it seems that a lack of supply is continuing to support higher prices, primarily in London and the south-east,' Richard Donnell, director of research at Hometrack, said in a statement yesterday. 'House prices look set to increase further.'

Prices rose in all 10 regions measured by the survey, led by a 1.3 per cent gain in London, Hometrack said.

A banking-bonus round worth 8.8 billion last year has helped house-price gains in the capital and the surrounding south-east of England.

Other reports have suggested that interest rate increases in August, November and January are starting to cool the housing market.

Home values rose at the slowest pace in seven months in January, a survey by the Royal Institution of Chartered Surveyors showed on Feb 15.

The central bank left its key rate at a five-year high of 5.25 per cent in February, and indicated on Feb 14 that another increase may be needed to bring inflation to the 2 per cent target by 2009.

Investors are betting on higher rates.

The implied rate on the interest rate futures contract for June closed at 5.73 per cent in London on Feb 23.

The contract settles to the three-month London interbank offered rate for the pound, which averaged about 15 basis points more than the central bank benchmark for the past decade.

A basis point is 0.01 percentage point. - Bloomberg