House prices in the UK rose 0.9% in July 2013, the sixth successive monthly increase and greatest increase since August 2010. This represents a 4.6% annual increase bringing the average UK house price to £169,624. The document examines three potential reasons for rising house prices: 1) increased consumer confidence in the economy, 2) low interest rates due to Bank of England monetary policy, and 3) the government's Help to Buy home buying scheme.

1. Andy Reeve The Grange School, Hartford, Northwich September 2013
According to the Halifax, house prices rose by 0.9%
in July 2013, a sixth successive monthly rise. This
equates to a 4.6% year on year increase to July. This
represents the greatest increase in the price of
property since August 2010. The Halifax state that
the average price of a home in the UK now stands at
£169,624. Of course, with CPI inflation currently
running at 2.8% (July 2013 figure) and RPI at 3.1%,
the real increase in house prices is lower.
So, why the increase in prices? As with all prices, there
is often a whole raft of reasons. However, this article
will examine three potential explanations:
1 Increased consumer confidence in the economy
2 The Bank of England’s Monetary Policy decisions
3 The Governments “Help to Buy” scheme
The graph below shows the level of consumer
confidence, according to Trading Economics and
GFK NOP (UK). The figures show how in the last
few months there has been a significant improvement
in the levels of consumer confidence across the United
Kingdom. To place this in context, the average level
of consumer confidence during the period 1981 to
2013 was -9.71, with a record low of -39 in July
2008 and a high of +10 in June 1987. The level of
consumer confidence provides a measure of the
degree of optimism across the nation. During periods
of higher consumer confidence, consumers are making
more purchases and therefore adding to the level of
Low Rates and Housing
“We expect house prices to see solid but
relatively limited increases over the rest of
2013 and then to strengthen more markedly
in 2014…However, housing market activity
is also currently still limited compared to
long-term norms despite the recent pick-up
activity”
Howard Archer; Chief UK and European economist at
HIS Global Insight
House prices are on the rise again across the
United Kingdom. Buyers, according to the
Royal Institution of Chartered Surveyors (RICS),
are returning to the market in their biggest
numbers for over four years. The rise in
prices is across the whole of the country,
although prices have increased the most in
London. Overall, RICS reports that prices rose
faster in July 2013 than at any time since
the housing market peak in November 2006
– pleasing news for homeowners, but
significantly less welcome for those aspiring
to join the property ladder.
In July, the British Bankers Association (BBA) released
a report that highlighted that mortgage approvals had
reached a 17-month high in June, totalling 37,278
mortgages. This equates to a 32.4% increase
compared to June 2012.

2. Andy Reeve The Grange School, Hartford, Northwich
economic activity. This heightened consumer
confidence might explain the reason for house price
rises. Equally, the increases in house prices might
help to explain the increased levels of confidence –
the Wealth Effect.
The new governor of the Bank of England, Mark
Carney announced a new form of monetary policy
at the beginning of August. Carney provided a clear
signal to the markets that the Bank of England will
not increase the Base Rate from 0.5% until the
official measure of unemployment falls from its
current rate of 7.8% to 7%. In other words, the nation
will need to generate an additional 750,000 jobs
before the end of 2016 before the Bank considers
an increase in rates. This form of “forward guidance”
has not been adopted in the United Kingdom before.
The Bank also stressed that it would keep the level
of Quantitative Easing at £375 billion until the end
of 2016 as well. Business leaders welcomed the
decision, as it provides them with security and
confidence. Equally, it means that mortgage payments
will not rise in the foreseeable future and it is hoped
that the news will lead to more lenders providing
cheaper fixed rate mortgages.
Finally, the Government’s “Help to Buy” scheme will
provide an incentive for buyers to purchase property.
The first phase of the scheme was introduced in April
2013 and allowed buyers of new-build properties to
borrow 20% of the property’s value as an interest-
free five year loan. The latest government figures
show that 10,000 houses have been purchased
using the scheme. The more significant second phase
will begin in January 2014. This will offer £12 billion
of government guarantees to back mortgages for
buyers who lack large deposits. Vince Cable, the
Business Secretary, spoke of his concern that the
scheme might help to create a housing price bubble.
Speaking on the BBC Andrew Marr show, Cable
stated that “the proposal which hasn’t been
implemented, which is providing a guarantee for a
limited range of mortgages, could be a problem. It
could inflate the market”. Although the “Help to Buy”
scheme has been welcomed by British mortgage
lenders and house builders, it has been criticised by
the government’s watchdog – the Office for Budget
Responsibility.
http://uk.reuters.com/article/2013/07/28/uk-britain-
economy-housing-cable-idUKBRE96R06I20130728
www.telegraph.co.uk/finance/personalfinance/house-
prices/10163028/Is-there-a-house-price-bubble-on-
the-horizon.html
www.ft.com/cms/s/0/535f956c-000c-11e3-9c40-
00144feab7de.html#axzz2bmve24Mm
www.bbc.co.uk/news/business-23668507
www.thisismoney.co.uk/money/news/article-
1607881/When-UK-rates-rise.html
“The world must have gone mad for us to now
be discussing endless taxpayer guarantees for
mortgages”
Graeme Leach, the chief economist at the Institute of Directors