U.K. House-Price Index Rises to Highest Since 2006

A U.K. house-price gauge rose to the highest in almost seven years in August as the economic recovery gathered pace and government measures boosted demand, the Royal Institution of Chartered Surveyors said.

The index increased to 40 from a revised 37 in July, the highest since November 2006, London-based RICS said in a report today, citing a poll of property surveyors. A proxy measure of demand rose to a record, while the outlook for prices advanced to the highest since 2002.

Recent reports suggest the property market is gaining strength as credit-easing initiatives from the government and the Bank of England boost mortgage availability. Chancellor of the Exchequer George Osborne defended his housing policy yesterday amid criticism he may be fueling a new bubble, saying it’s “sensible” and needed to help the market.

“House prices are a growing risk for the U.K.,” said Rob Wood, an economist at Berenberg Bank in London and a former BOE official. “Any increase in house building we see over the next few months and years, whilst welcome, will be woefully short of what is required to keep prices under control.”

Respondents to RICS’s monthly survey forecast prices will increase 2.2 percent over the coming 12 months and by 4.4 percent in each of the next five years. At the beginning of the year, they predicted 0.6 percent and 3.4 percent, RICS said.

The index of new buyer enquiries increased to 66 in August from 54 in July, the highest since the series began in 1999, and the outlook for prices over the next three months climbed to 45 from 37. In a sign that supply is not keeping up with rising demand, the measure of new seller instructions was at 26 last month, up from 16 in July.

Osborne Boost

Osborne’s Help-to-Buy, which began in April, has already spurred sales of newly built homes. The second phase, a guarantee program meant to unlock 130 billion pounds ($204 billion) of mortgage lending, will be available for all homes starting in January. The BOE’s Funding for Lending Scheme has helped improve mortgage availability, RICS said.

Other reports have also painted a positive picture of the housing market. Halifax, the U.K.’s largest mortgage lender, said last week that home prices rose for a seventh month in August and will probably continue to increase through the rest of the year. Hometrack Ltd. said on Sept. 2 that growth in home values accelerated in August amid the strongest market conditions in six years.

Monetary Policy

Bank of England Governor Mark Carney has said the BOE won’t consider raising its key interest rate from a record low until unemployment falls to 7 percent, something it doesn’t see happening until late 2016.

Wood said the housing market could be a “big challenge” for the interaction between the BOE’s monetary-policy function and its “financial stability side, which is tasked with heading off at the pass risks to the financial sector.”

RICS said the ratio of sales to stock, a measure of slack in the market, is “well below” its long-run average, indicating activity “has a long way to go before conditions are back to normal.”

Bank of England Markets Director Paul Fisher said there is no evidence of “bubble behavior” in the housing market and price gains have been below the rate of inflation. The property market should improve as supply increases, he said in an interview published in the Sunday Times on Sept. 8.

“We think that improving demand, combined with supply constraints, is likely to be supportive of house prices,” Blerina Uruci, an economist at Barclays Plc in London, said today. “However, in our view, the housing market is likely to experience a gradual improvement, held in check by the still weak state of household balance sheets, slow income growth and the fact that housing affordability remains weak.”

France Production

Elsewhere today, French industrial production unexpectedly fell for a third month in July, led by the automobile industry. Output declined 0.6 percent from the previous month, when it dropped 1.4 percent. Economists forecast a 0.5 percent gain, according to the median of 22 estimates gathered by Bloomberg News. Automobile output plunged 11.2 percent.

In Italy, data showed the economy shrank 0.3 percent in the second quarter, more than the 0.2 percent initially estimated. Consumer spending declined 0.4 percent and exports increased 1.2 percent.

Bank of Italy Governor Ignazio Visco said recent economic indicators are “consistent with gradual improvement.” He also said that downside economic risks “are compounded by investors’ concern about possible political instability.”

A senate panel is considering whether to vote in favor of the expulsion of former Prime Minister Silvio Berlusconi, a move that could undermine the coalition government. On Aug. 30 Berlusconi said that the PDL may withdraw its support for the government if the senators of Prime Minister Enrico Letta’s Democratic Party vote to oust him from Parliament.

Before it's here, it's on the Bloomberg Terminal.