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House price inflation to hit double figures this year

House price inflation to hit double figures this year

House price inflation in cities is running at 8.4 per cent per year, according to Hometrack’s latest house price index, with this year looking set to exceed 10 per cent following first half growth of 6.3 per cent.

The residential property market specialist stated that while the annual rate of growth has moderated slightly over the last six months, the three month rate of growth has been accelerating, as low mortgage rates and improving economic outlook support demand.

House price inflation at a city level ranges from 11.6 per cent in Cambridge to 2.9 per cent in Liverpool.

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The fastest growing cities during the first half of this year have been Oxford (8 per cent), London (6.6 per cent) and Glasgow (6.4 per cent), while the weakest growth was registered in Aberdeen where average prices have been flat.

Looking to the second half of the year Hometrack expects the headline rate of growth across the 20 cities index to gain further momentum towards 10 per cent year-on-year as households continue to price low mortgage rates into the market on the back of rising demand, low turnover of stock and prices rising off a low base in regional cities.

This trend has largely run its course in inner London, where growth has slowed dramatically, instead shifting into outer London. Across other cities, the pick-up in house price inflation will be welcome news for existing mortgagees, as lower loan-to-values will create headroom to re-mortgage onto better rates, the report noted.

The greatest risk on the horizon remains an increase in interest rates, as while a year’s worth of new buyers have been subject to tougher affordability tests, the majority of mortgagees have not.

Over half (57 per cent) of mortgage balances are on variable rates, according to Hometrack. While this is down from a high of 73 per cent, small stepped increases in mortgage rates are likely to impact market sentiment, slow demand and lead to a slowdown in the rate of house price growth.

Jeremy Duncombe, director of the Legal and General Mortgage Club, commented that the Monetary Policy Committee’s recent comments hinting at a rate increase will create a greater sense of urgency among people wanting to own their own home, and combined with rising wages and low inflation figures, this will drive up demand in the remainder of the year.

“Banks will also look to price in a rise before one is announced, making it more important than ever for those looking to remortgage to secure a deal before the best rates disappear from the market.

“The opening of the demand flood-gates is likely to drive house price inflation to new highs in the future unless more houses are built to bring balance to the market.”

peter.walker@ft.com