Housing market was 'running out of steam' before rate rise

Britain's long-running housing boom was petering out even before last week's shock increase in interest rates, according to a survey published today.

The closely watched report from the Royal Institution of Chartered Surveyors (Rics) shows a dramatic slowdown in the rate of house price growth in December, as November's rate rise began to bite. Rics predicts the market will cool further in response to the latest increase in borrowing costs, which saw the base rate unexpectedly lifted by a quarter-point to 5.25 per cent, adding £16 to monthly payments of those with a £100,000 repayment mortgage.

The monthly survey of Rics members shows 37 per cent more reported a rise than a fall in house prices in December, a sharp drop from November's 46.9 per cent and the lowest balance since last August.

"The pace of increase remains strong, above the long-run average of 21 per cent, but this is the first real evidence that the November rate rise has started to take some of the heat out of the market," said Rics spokesman Ian Perry. "Last week's rise will have a further impact in the coming months."

The South-east, outside London, is bearing the brunt of the slowdown, the report says. Prices in the capital continue to roar ahead thanks to City bonuses and the buoyant financial services sector.

Earlier this month, Britain's biggest mortgage lender, Halifax, reported a 1 per cent drop in house prices in December, but most analysts dismissed the fall as a "correction" after a series of punchy increases. Today's report suggests the weakening picture painted by the bank may have been more accurate than thought.

Ed Stansfield, property economist at Capital Economics, said recent anecdotal evidence had been mixed, but there were reports of buy-to-let landlords pocketing profits and selling up, another sign the market has peaked. He said: "The shock timing of last week's rate rise was designed to make sure it was noticed as widely as possible, and has reinforced our conviction that the housing market will slow this year."

Signs that its monetary medicine is working will come as a relief to the Bank of England, and soothe fears interest rates have much further to climb. Also encouraging were official figures showing pipeline inflationary pressures remain under control. Although factory gate inflation nudged up from 1.8 per cent to 2.2 per cent in December, raw material costs were 1.9 per cent higher than a year ago, down from 3.3 per cent in November and the smallest annual rise for nearly three years.

"Whatever spooked the Monetary Policy Committee into hiking rates last week, it doesn't appear to have been producer prices," said George Buckley, economist at Deutsche Bank.

All eyes will be on today's December inflation figures amid speculation the CPI measure targeted by the Bank has breached 3 per cent, requiring its Governor, Mervyn King, to write a letter of explanation to the Chancellor, Gordon Brown.

The Treasury minister, Ed Balls, defended the Bank yesterday, saying pre-emptive rate moves were the best way to control inflation.