British Home Prices May Be on Their Way Down

A feverish rise in the price of British homes may be ending as higher interest rates boost home loan costs, economists say.

This, they add, will ease inflationary pressure and other strains on the country’s buoyant economy, now in its eighth year of expansion.

The surge in house prices in recent years, especially in affluent areas near London, has been staggering.

Halifax Building Society, the largest of Britain’s equivalent of U.S. savings and loans institutions, this week estimated the annual house price inflation rate in July at 28%, the highest since 1979.

Home prices are rising more than four times as fast as average incomes. The average house price nationwide in July reached at least 60,000 pounds ($102,000), lenders say.

Bank Interest Rates Raised

But Prime Minister Margaret Thatcher’s Conservative government, which has encouraged home ownership in its nine years of power, recently has raised bank interest rates to cool a credit-driven consumer boom and cap inflation.

British mortgage rates, which track bank rates, have also risen. They went up by 1.75 percentage points to around 11.5% this month.

Also, effective Aug. 1, a system whereby two people could claim tax relief on a mortgage on one property was ended. The rush to buy homes ahead of that ban is over, which should take some steam out of the rise in house prices.

As the housing price boom slows, those who own their homes are likely to feel less wealthy. Wage demands may also be more modest, so the prospect is thus of less inflationary pressure.

“House price inflation will come down significantly though house prices won’t fall in nominal terms,” said economist Evelyn Brodie of Morgan Grenfell Securities.

“Once the bubble of house price expectations is burst . . . and begins to work through the economy, it will help solve the problems of inflation and the current account deficit,” Brodie said.