Press

Low rates key reason for UK house price gains

News Service:	Dow Jones Newswires
Author:	Natasha Brereton
Date :	23rd May
Relates to:	Events - An affordable and sustainable future for the UK housing market

LONDON (Dow Jones)--Low long-term interest rates have been a key reason behind dramatic gains in U.K. house prices, but a shortage of supply has also played its part, a member of the Bank of England's Monetary Policy Committee said Wednesday.

"You wouldn't immediately assume that a fall in interest rates would make housing less affordable," Kate Barker said at an event organized by CentreForum and the Policy Exchange. "It would, of course, raise prices, but given people wouldn't have to pay as much for their mortgages, they'd still be able to afford them."

Evidence has suggested that people are paying much higher house price-to-earnings ratios without any particular difficulty, but the fact that there are people who are unable to get into the market even when they stretch themselves indicates there must be another factor at work, Barker said.

"I certainly think that the behavior of interest rates is a large reason why prices have risen. But I think...the role of supply, the fact that we haven't had enough supply is a part of it," she added.

Barker also noted that a large number of people have been drawn into the buy-to-let market.

In 2004, Barker delivered a review of housing supply in the U.K. where she identified that around 200,000 new homes needed to be built each year in order to bring real house price growth closer to the European Union average of around 1.1%, and to keep pace with the growing number of people in the U.K. in need of somewhere to live.

And the U.K. government believes that up to 209,000 new homes need to be built each year in order to keep pace with the growing U.K. population.

Since the Barker review, however, the number of properties being constructed in the U.K. has remained well below both targets.

The number of new housing starts totaled 173,400 in the first quarter of 2007, 6% below the corresponding period in 2006. The number of completions, meanwhile, increased 3% on the year in January-March this year to 167,700, according to figures from the Department of Communities and Local Government.

"Current housebuilding rates have persistently undershot government targets and incentives for stimulating housebuilding levels," said Oliver Gilmartin, senior economist for the Royal Institution of Chartered Surveyors.

"The total shortfall in house building in Great Britain, between 1998 and 2006 is 313,000 and current builds per year remain well below the 209,000 needed every year just to keep up with the government's estimates for household growth up to 2026."

Barker said Wednesday that while there were no quick solutions to the U.K.'s housing supply problems, policy on the issue is in a better state than it was a few years ago.