UK inflation dips - but not for property

The UK's annual inflation rate unexpectedly fell back to just two per cent in July, but house prices rose at their fastest rate in almost 17 years, according to official data.

David Sapsted

19 August 2021

While economists had expected the Consumer Price Index to fall slightly from the 2.5 per cent recorded in the 12 months to June, the size of the drop in July had not been anticipated.The Office for National Statistics (ONS) put down the bigger-than-expected dip to a fall in the price of clothing and shoes, toys and games, and package holidays. The main item pushing prices up was petrol, whose average price of 132.6p a litre last month was more than 20p higher than a year earlier.Despite the latest fall in the CPI, most economists expect the rate to rise to nearly four per cent by the end of the year, before dropping back in 2022. Liz Martins, UK economist at HSBC, told the BBC that the size of the latest fall had come as "a bit of a surprise" and said it countered the view of some that inflation was about to go out of control.But she said inflation was expected to rise in the coming months. "The temporary VAT cut is going to be removed for hospitality, we've got some inflationary big energy bill hikes coming," she said.So we do think inflation could go up towards the end of the year and then come back down again around the turn of the year and into next year."House price inflation, meanwhile, was calculated at an eye-watering annual rate of 13.2 per cent in the year to June, pushing the average price to £266,000 - £31,000 more than a year earlier.

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Pent-up demand, the search for bigger homes - often in more rural locations - as a result of the pandemic, and the waiving of stamp duty on properties worth less than £500,000 have all contributed to the rise.The ONS said the sudden jump in the June figure was primarily due to a rush to buy because the stamp duty holiday dropped from its £500,000 threshold to £250,000 at the beginning of July. The threshold will fall to its pre-pandemic level of £125,000 at the end of September.There were also some marked regional variations in the rate of property price rises. In NW England, it stood at almost 19 per cent and reached nearly 17 per cent in Wales. But in London - the area whose economy was hardest hit by pandemic lockdowns - the annual increase was 'only' 6.3 per cent.Samuel Tombs, a UK analyst at Pantheon Macroeconomics, said he did not expect the current rates of property inflation to last. “We anticipate that house price growth will slow over the coming months, as the impact from the temporary increase in the stamp duty threshold fades, particularly once it returns to £125,000 at the end of September."Timely indicators also suggest house price growth will decelerate. For instance, Rightmove reported that asking prices rose at a far more restrained 5.6 per cent, year-on-year rate in August.”Nicholas Finn, executive director of Garrington Property Finders, agreed that "clearly" such rapid growth could not continue indefinitely and suggested the June figure might well prove the high-water mark of property price inflation."With the stamp duty holiday already over in Wales and Scotland, and tapering away in England and Northern Ireland, the temporary stimulus it provided is fading fast," he said."Instead prices are now being driven by the more conventional market dynamics of demand and supply. Demand remains strong as the recovering economy prompts thousands of would-be property buyers who had been waiting for normality to return before taking the plunge to ask themselves the question: 'If not now, when?'"Record low interest rates are blunting the impact of rising prices on affordability to a degree, and with buyer demand still outstripping the supply of homes for sale in many areas, prices continue to notch upwards."Nevertheless on the front-line, we're seeing buyers become increasingly realistic, rather than romantic, in what they are willing to pay."