Thursday, May 13News For London

House prices soar almost 8% in London, as inflation remains muted

The cost of housing soared 7.7% in the year to October 2015, the Office of National Statistics has revealed.

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Photo by Peter Adams

 

The 7.7 per cent increase in London house prices was above the rise in the national average, which saw a rise of 7 per cent.

Scottish housing saw the weakest rise in prices, at just 0.9 per cent.

During the same period, Consumer Price inflation remained muted, with a rise of just 0.1% in the year to November 2015.

 

Source: Office of National Statistics
Source: Office of National Statistics

Hidden depths

The headline inflation figures are low, but inflation can vary, depending on which social groups people belong to.

For example, young people moving to London will face rising housing costs, as they climb the housing ladder for the first time.

Linda Yueh, the BBC’s chief business correspondent told Westminster World that inflation measures don’t reflect the true costs of housing.

“Housing is not fully considered in UK headline inflation, especially house prices as it’s usually rent or housing use costs” she said.

In this way, the housing market boom is being subtly hidden from the headline figures, as other kinds of housing-related costs get taken into account instead.

Off target inflation

The ONS said that items such as clothing and footwear had helped put downward pressure on overall prices.

Transport costs and items, including alcohol and tobacco had nudged inflation into positive territory.

The Bank of England set a target inflation rate of 2 per cent in the early 2000s, but today’s figure represents yet another case of sub-target inflation.

When inflation figures exceed or undershoot the 2 per cent target by one percentage point, the Governor of the Bank of England is obliged to write a letter to the Chancellor of the Exchequer, to explain why the Bank failed to hit the 2 per cent target.

 

Source: Office of National Statistics
Source: Office of National Statistics

 

As the chart above shows, inflation in the UK has been erratic over the last 10 years. It spiked to 5.2% in 2008, and again in 2011, before tumbling slowly down, close to zero this year.

The prime reason for inflation being below target is the sustained fall in energy prices.

That happened, in response to a collapse in the price of Crude Oil, back in 2014. The Bank of England expects inflation to return close to the 2 per cent target by 2017.

Interest rate rises expected to follow

This projected return to the 2 per cent target is significant. It will serve as a crucial signal for the Bank of England to start raising its benchmark interest rate from 0.5 per cent.

For nearly 7 years, the Bank of England, the US Federal Reserve and the ECB have had rates close to zero, in a policy termed “ZIRP”.

The cost of money was brought close to zero in 2009, in a bid by central bankers to stop the financial crisis from deepening

Tomorrow will be an important day at the Federal Reserve.

Fed Chair Janet Yellen is expected to announce an increase in the Federal Reserve’s benchmark interest rate.

This would mark the first US rate rise since 2006.

Mark Carney, Governor of the Bank of England, addressed the Treasury Committee last month.

He said the Bank of England would follow suit soon, but insisted “it still will be a relatively low interest rate environment”.

Interest rate rises matter, as young workers are seen as net borrowers.

A rise in interest rates in the US or the UK would raise the value of mortgages, and provide a disincentive to borrow.