House Prices Fall - Inflation Rises

UK house prices have fallen for the 8th consecutive month. According to hometrack, house prices have fallen 1.9% since 12 months last year. Average house prices in the UK are now £172,200 according to hometrack.

Falling house prices are closely related to the slump in mortgage lending. The British Bankers Association BBA said mortgage lending was down 39% on this time last year.

More worryingly is the reported rise in mortgage defaults, especially from those with bad credit histories. The rise in mortgage defaults is occuring partly due to the increased cost of living. Higher cost push inflation has pushed the CPI rate to 3%, although the underlying rate is higher. Higher oil prices and food prices are the main causes of inflation at the moment. The MPC is concerned that these cost push factors will feed through into higher inflationary expectations making inflation more difficult to control in the future.

Interest Rate Predictions

Given the conflicting economic signals, the MPC face difficult choices when it comes to changing interest rates. On the one hand they want to cut rates to boost the economy and prevent a housing downturn turning into a slump. On the other hand their primary objective is low inflation. If inflation is above target how can they cut rates. The MPC will be hoping that inflationary pressures ease as the economy slows allowing a moderate rate cut in the next few months. Perhaps 4.5% by the end of the year.

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