UK house prices jumped 2.2 percent in May to push annual housing inflation above 20 percent for the first time since June 2003, a key survey showed on Tuesday, adding pressure on the Bank of England to raise rates. The seasonally-adjusted Halifax House Price Index showed prices ignoring three interest rate rises since November to pick up pace from the 1.8 percent monthly increase and the 19.1 percent year-on-year increase reported in April.
"It really indicates that interest rates are going to have to go higher," said James Knightley at ING. The Bank of England has consistently denied targeting house prices but some economists believe it should raise rates to check rampant housing inflation to avoid a crash that could unsettle the economy. A narrow majority of economists polled by last week said they expect the BoE to raise interest rates another quarter point to 4.5 percent when its Monetary Policy Committee meets on Thursday. Strong housing demand, together with supply shortages, have maintained house price inflation at a high level this year, Halifax said. Economists believe interest rates that are still low by historical comparisons are also boosting the market. Halifax expects the housing market to begin to slow later in the year and into 2005, as interest rate rises begin to bite. However, for the time being many first time buyers have been priced out of the market, a factor some commentators predict could prompt a hard landing in the market. "The number of first-time buyers as a percentage of all homebuyers dropped back to 28 percent after successive increases in February and March. This proportion remains well below the long-term historical average of nearly 50 percent," said Martin Ellis, chief economist at Halifax.
However, economists sounded a note of caution about the Halifax figures, saying the actual rate of inflation was probably much lower than the 20.4 percent Halifax registered in the three months to May compared with a year earlier. Official figures from the Office of the Deputy Prime Minister showed annual house price rises below 10 percent. The average UK house price now stands at 157,849 pounds ($290,500), Halifax said.///www..com