Two more interest rate rises likely this year, top economists predict

The Ernst & Young ITEM Club - a group of economists highly regarded by politicians and some sectors of the property industry - is warning that the housing market will remain “lacklustre” throughout 2018.

Citing recent data from the Halifax, which showed annual house price inflation moderating to 1.8 per cent, the club issued a statement saying: 

“Housing market activity is expected to remain lacklustre as the extended squeeze on consumer purchasing power only gradually eases, confidence is fragile and appreciable caution persists over engaging in major transactions. Potential house buyers also look highly likely to face further interest rate hikes in 2018. We expect the Bank of England to raise interest rates twice in 2018. Furthermore, house prices are relatively expensive relative to incomes.”

It says the market will remain bolstered by a relatively low number of homes available for buyers, and by wider economic strengths such as high employment. 

Howard Archer, chief economic advisor to the EY ITEM Club, comments: “The underlying softness of house prices on the Halifax measures was evident in prices falling 0.7 per cent in the three months to February compared to the three months to November. 

“We believe that 2018 will be a difficult year for the housing market. Price gains over the year are likely to be limited to a modest two per cent.

“The fundamentals for house buyers are likely to remain challenging. The squeeze on consumers’ purchasing power remained significant going into 2018, and it is likely to only gradually ease as the year progresses. In addition, housing market activity could be hampered by fragile consumer confidence and a limited willingness to engage in major transactions.

“We now expect the Bank of England to raise interest rates twice in 2018 (each time by 0.25 per cent), with the next move likely in May. 

“Housing market activity and prices are also likely to be impacted by stretched house prices to earnings ratios and tight checking of prospective mortgage borrowers by lenders.

“The abolition of stamp duty for first time buyers for properties costing up to £300,000 (and on the first £300,000 for properties costing up to £500,000) should also provide some support to house prices. However, even if successful, the Chancellor’s measures to boost house building in the Budget will take time to have a significant effect so are unlikely to influence house prices in the near term at least.”