Official UK house prices figures fall, seen rising 2-3% in 2018

Official UK figures showed house prices are falling more than expected and are predicted to worsen in coming months.

The official house price index fell by 0.5% month-to-month in October, the Office for National Statistics revealed on Tuesday.

House prices in September were also revised down by 0.6%. As a result, the year-over-year growth rate decreased to 4.5% in October from 4.8% in September, well below the consensus, 5.2%.

In early November, the Bank of England raised interest rates for first time since 2007 and this week sees another monthly rates meeting for its Monetary Policy Committee.

The official measure of house price inflation lags many of the other measures as it is based on mortgage completions.

More recent data from Rightmove for online house asking prices showed a slowing to just 1.2% growth in December, from 1.8% in November, while the most recent poll of surveyors by RICS showed largest net balance since the referendum reporting that they expect prices to fall over the next three months.

Economist Sam Tombs at Pantheon Macroeconomics said the October data suggested the housing market "is in poor shape to cope with higher interest rates".

He added: "The impact on prices from the recent increase in mortgage rates won’t emerge in the official data for some time, but we know from several surveys that market conditions have worsened recently."

Tombs expects mortgage rates to rise further from the end of February, when new lending will no longer generate drawing rights for banks from the Bank's term funding scheme. "We continue to think, then, that house prices will merely flatline in 2018."

Howard Archer, chief economic advisor to the EY ITEM Club, said potential house buyers may be concerned by the BoE hiking interest rates early in November.

“This reinforces our belief that there is unlikely to be a significant upturn in housing market activity any time soon.”

The ITEM Club sees house prices rising a modest 2-3% in 2018.

"The fundamentals for house buyers are likely to remain challenging over the coming months with consumers’ purchasing power continuing to be squeezed by inflation running higher than earnings growth," Archer said. "Additionally, housing market activity is likely to be hampered by fragile consumer confidence and a limited willingness to engage in major transactions.

“It is also very possible that the recent BoE interest rate hike will weigh down on housing market activity. While the increase in interest rates was just 0.25% and mortgage rates are still at historically very low levels - with the impact further limited by the fact that the share of mortgages on variable rates has fallen to around 40% from a peak of 70% in 2001 - the fact that it was the first rise since 2007 could have a significant effect on housing market psychology. Having said that, the BoE again stressed that interest rates will rise only gradually and to a limited extent."