Rate rises start to dampen house price inflation

Further evidence of a slowdown in the housing market emerged yesterday, as the Government's Land Registry said house price inflation had fallen to its lowest rate in more than a year.

House prices across the country rose just 0.1 per cent in July, compared with the previous month, taking the annual rate of growth to 8.8 per cent. However, the statistics revealed large variations in house price inflation within different regions of the country.

In the South-east, prices rose by 1.1 per cent month on month, while London saw a 1 per cent increase. Over the past year, house prices in the capital have risen 15.5 per cent, with the average property now selling for some £342,936. In contrast, house prices in Wales, Yorkshire and the West Midlands all fell in July. The average price of a property in the West Midlands is now £150,915, up 4.5 per cent on the same time last year, but down 1.4 per cent since June.

David Stubbs, an economist at the trade body the Royal Institute of Chartered Surveyors, said the statistics showed that the impact of the recent run of interest rate rises was beginning to take its toll – particularly in the poorer regions.

"The housing slowdown continues to accelerate as homeowners and prospective buyers deal with the impact of five interest rate increases since last August, and the most stretched affordability conditions for more than 15 years," he said. "The number of new buyer inquiries has fallen for eight months in a row and the amount of stock on estate agents' books has risen every month since March, as supply is now outstripping demand.

"A difficult 2008 looms for the housing market, and it will be made even worse if interest rates rise to 6 per cent."

Despite the slowdown in prices, competition in the mortgage market remains as tough as ever. Melanie Bien, a director of the independent mortgage broker Savills Private Finance, said she had not yet seen any reluctance from lenders to grant mortgages to borrowers with good credit histories. "Lenders offering five or six times salary are still out there," she said. "I haven't seen a difference this year so far compared to last year even though the base rate has increased five times and mortgages are less affordable.

"I think that lenders are looking more carefully at applications and scrutinising elements that they didn't used to take too much heed of previously. But I've not seen any major shift in attitude."

David Hollingworth of the independent brokers London & Country agreed, but added there had been a tightening of borrowing in the UK sub-prime lending market. "These kind of lenders are reliant on securitisations, so they've been forced to tighten up their lending criteria and raise interest rates," he said.

Interest rate rises also look to be taking their toll on the high street, as higher mortgage payments have forced consumers to cut back their spending. The British Retail Consortium said the effects of the five rate hikes were just starting to come through following a difficult weekend, when consumers stayed away from the high street to take advantage of some rare sunny weather in an otherwise bleak summer.

Malcolm Pinkerton, business information analyst at the BRC, said: "The only growth at the moment is coming from discounting and promotions."