Higher rates are cooling house price growth, says Halifax

Higher interest rates are starting to take the heat out of the boom in house prices that has seen the cost of the average home double within five years, Britain's leading mortgage lender said yesterday.

With the City and industry braced for a fresh increase in borrowing costs from the Bank of England today, the Halifax said the monthly increases in property inflation levels had eased during the past two months.

The bank said prices rose by 1.3% in July following a 1.2% increase in June, but added that both were well down on the 2%-plus jumps earlier in the year. Even so, the average cost of a home in Britain had climbed above £160,000 for the first time - more than double the level in July 1999.

Martin Ellis, Halifax's chief economist, said: "The house price gains in June and July represent a clear step down from the 2%-plus monthly price seen, on average, in the preceding six months. These figures, along with other housing indicators, suggest that the market may be slowing."

The City believes the Bank of England will raise rates by 0.25 percentage points to 4.75% today, in what would be the fifth increase since November. Mr Ellis said the full effects had yet to be felt of previous tightening by the monetary policy committee and dearer borrowing costs would "continue to act as a brake on house price growth over the coming months".

He said while the doubling of prices since 1999 was "good news for existing home owners", it highlighted the "growing hurdles facing potential first-time buyers as they try to purchase a property." The Halifax data coincided with the latest snapshot of the service sector from the Chartered Institute for Purchasing and Supply, which suggested a slight moderation of the rate of growth in the mainstay of the economy last month.

The purchasing managers' index for services - which account for about two-thirds of the economy's output - fell for the third month in a row but remained at a level which suggested the sector was still enjoying robust growth.

According to the CIPS, the index fell from 56.8 in June to 56.2 in July. Any reading above 50 indicates expansion, while one below 50 indicates that the sector is in recession.

John Butler, a UK economist for HSBC bank, said: "Although service sector growth may have peaked a while ago, the data still points to robust growth in the sector." Analysts said the Bank was unlikely to be deterred from raising rates by the slight easing in the rate of service sector growth and house price inflation. Mark Richards of Lombard Street Research said back to back quarter-point increases in August and September were likely.