Economic PESTEL (Anoushka Patel)

Economic factors

-       interest rates

Even as the economy just begins to emerge from recession, the housing market is already showing signs of overheating. In some areas, house prices are rising 10% a year – much higher than CPI inflation of 1.6%.

Expensive house prices threaten the economy in various ways:

            Make many areas unaffordable for young people causing shortages of skilled labor.

            Increased wealth inequality between home owners and renters.

                        An unsustainable boom in house prices could lead to an eventual fall in prices, with corresponding bank losses and negative wealth effect.

The recent tone on interest rates from ratesetters has been one of caution.

The Bank of England can leave interest rates at rock bottom for some time because of weak wage growth and low inflation, deputy governor Sir Jon Cunliffe says.

He commented that the recovery ‘has remained strong’ but the central bank has ‘now seen evidence of a slowing in UK growth and prospects for the global economy have deteriorated’.

He said subdued pay and inflation at home and the darker outlook overseas ‘implies that we can afford to maintain the current degree of monetary stimulus [interest rates at 0.5 per cent] for a longer period than previously thought’.

Cheaper fuel and lower energy prices brought the rate of UK inflation to a record-equalling low in December, official figures show.

Inflation as measured by the Consumer Prices Index dropped to 0.5% last month, from 1% in November according to the Office for National Statistics.

The last time 12-monthly inflation was this low was in May 2000, the ONS said.

The rate of Retail Prices Index (RPI) inflation, which is calculated differently, also continued a downward trend, falling to 1.6%, down from 2%.

The UK economy grew by 0.7% in the third quarter of 2014, according to figures from the Office for National Statistics.

The UK's gross domestic product (GDP) in the third quarter was 2.6% higher than in the same period a year earlier, the figures showed.

 Unemployment fell by 58,000 to 1.91 million in the three months to the end of November, according to the latest Office for National Statistics (ONS) figures.

The number of people claiming Jobseeker's Allowance in October fell by 29,700 to 867,000, the ONS said.

The jobless rate was 5.8%.

House prices have increased as activity in the housing market has picked up sharply at the end of 2013 following a few years of relative stagnation.

The Halifax survey said that prices had risen by 7.5% over the course of 2013, while the Nationwide said house prices were up at an annual rate of 8.4%.

The Nationwide compares prices in one month with the same month a year ago. However, the Halifax compares a three-month period with the three-month period in the previous year.

On each measure, the average price of a house also went through the £170,000 mark for the first time in five years.

However, the figures are still below the peak of the market in August 2007, when the average price was almost £200,000.

This is a UK average figure, driven by London and the south east of England. Some parts of the country have seen relatively little house price growth.