Rise in UK House Prices in Feb 2007

U.K. property prices accelerated for a second month in February as a shortage of homes for sale mitigated the impact of higher interest rates, a survey showed.

Asking prices rose 0.9 percent after an 0.5 percent increase in January, according to Rightmove, Britain's biggest Web site for property advertisements. A 9.7 percent rise in values in the City of Westminster fueled a 1.1 percent increase for London.

``Everything is turning around in days or weeks,'' said James Gubbins, agent at Dauntons realtors in the London borough of Westminster and Pimlico. ``The current level of interest rates isn't going to affect the market as it is at the moment. They'd have to move another percent.''

from: http://www.bloomberg.com/apps/news?pid=20601102&sid=aTCi8qTZoomk&refer=uk

Effect of the UK Housing Market on the rest of the UK economy

The UK housing market can have a big impact upon the UK economy. With rising house prices there is a corresponding rise in the wealth of homeowners.

1. Firstly house prices are the biggest form of wealth in the UK. If house prices rise, then it has a significant impact upon consumer wealth.

2. If house prices rise it can lead to increased consumer spending for 2 reasons. Firstly increased house prices will lead to a rise in consumer confidence. As people feel more “wealthy” they have more confidence to spend. Secondly people can remortgage their house to take out equity from their house. This gives them more money to spend.

3. Therefore rising house prices lead to an increase in consumer spending. As consumer spending is the biggest component of Aggregate Demand (66%) higher house prices lead indirectly to increased rates of economic growth.

4. However it is worth bearing in mind that rising house prices, do not necessarily lead to higher growth rates, it depends upon what else is effecting economic growth, such as taxes and government spending.

5. Rising house prices can lead to inflation. If the increase in house prices causes a rise in consumer spending then it could cause inflation, especially if the economy is close to full capacity. For example in the late 1980s the UK economy witnessed very fast rises in house prices and this was a major contribution to the rampant inflation of the late 80s boom.

6. Higher house prices can lead to increased interest rates. Interest rates are set by the bank of England. There primary target of monetary policy is to keep inflation at 2% CPI +/-1 A rise in house prices doesn’t automatically cause interest rates to rise, but if the bank feel that increased house prices will feed through into higher inflation then they will raise interest rates to pre-emptively stop inflation.

7. Regional variations in house prices can affect local economies. For example very high house prices in London can cause a shortage of skilled labour like teachers and policemen. This is because it is too expensive to be able to buy houses in the UK.

More on UK Housing Market

Myths of UK Housing Market

A look at some of the myths of the UK Housing Market including whether prices will always keep on rising in hotspots like London? Will house prices ever fall?