UK strong house price growth signals further rises in interest rates

By: Nadeem_Walayat

Hometrack revealed house prices in the UK surged in March to take the annualised rate to 6.7% from 6.4%. With the likelyhood of further strengthening as the market moves into a traditionally stronger housing market demand period going into the summer. London experienced an even stronger growth of 1.8% due to the boom in the financial services industry, which provided a lift to the overall UK figures.

This confirms my expectations of further interest rate rises during 2007 towards our target of 5.75%, (UK Interest Rates could rise to 5.75% in 2007) - Nov 06. The expectation is now for the next rise in interest rates to come in a little over a months time at the May 2007 Bank of England MPC Meeting. A rise in April is highly unlikely, given the soft tone amongst the MPC members who voted 8-1 to keep interest rates on hold, with 1 vote for a cut.

Additionally my house price target remains for house price growth of between 5% to 7% during 2007, as I expect a cooling towards the end of the year, which 'should' reduce the annualised house price growth from a summer peak.UK House Prices continue to Rise whilst the US Housing Market Slumps. However, the risks to this are the continuing excessive growth in London, pulling the whole UK market beyond the upper range of 7%.

The continuing meltdown in the US housing market has failed to impact on the UK housing market, this lack of impact is expected to continue into late 2007, after which the reaction of the financial markets to the possibility of the US going into recession will start to bare down on the UK economy and the UK housing market. The tendency is for the housing market to act as a leading indicator of a significant slowdown in the UK economy going into 2008, much as the slump in the US housing market is signaling a recession in the US.

Despite the anticipated economic slowdown, inflationary pressures at that time may not allow significant cuts in UK interests, as the inflationary climate gathers strength across the world economies due to excessive money supply growth in recent years which is set to continue into 2008. So this time the situation may more resemble the 1970's rather than 2001.

One clear sign of this anticipated scenerio, would be for crude oil to once more trend higher towards a new high, the possibility of this grows as demand grows and supply tightens due to a number of factors including China cutting back on Oil exports, declining yields from oil producing nations such as Britain and the Norway, in adequate investment in oil infrastructure as in Iran and Mexico, and the failure to develop Iraqi oil output. And above all, the risks of a confrontation with Iran, the threat of which may drag on for several years, which would tend to put upward pressure on crude oil prices and thus inflation.

By Nadeem Walayat
(c) MarketOracle.co.uk 2007

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