Wednesday 2nd July 2014
The Pound has surged higher this morning, after data showing UK House prices have seen their highest rise in over 10 years. This coupled with better than expected construction data has strengthened the Pound to a 2 year high against the Euro (€1.2560) and a 6 year high against the UD Dollar ($1.7170).
UK House Prices cause Sterling to rise to record levels
House prices across the UK soared by 11.8 per cent in the last year, the biggest annual rise for almost a decade. Britain's booming housing market shows little sign of cooling, with the average property hitting a new all-time high of £188,903.
So why has this strengthened the Pound? It’s all to do with interest rates. Last week, the Bank of England moved to put curbs on riskier mortgage lending by announcing that loans of 4.5 times a borrower’s income or higher should account for no more than 15 per cent of new mortgages issued by lenders.
The Bank also said that lenders should apply a new 'stress test' ensuring that borrowers can keep up their mortgage repayments in the event of a rise of up to 3 per cent in interest rates over the first five years of the loan.
But is this enough? I’m not so sure. Usually to cool the housing market the Bank of England would raise interest rates. However as inflation and wages aren’t growing at quite the same speed as house prices, this could dampen the economic recovery, so it’s unclear whether the BoE will indeed raise rates. The markets clearly think this is now more likely however, as the Pound has risen to multi-year highs against other currencies.
Construction is also growing, with this sector showing its strongest growth "for a generation" in the second quarter after a respected survey showed activity continued to surge last month. This also helped push Sterling higher.
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Labels: Best Exchange Rates, Currency, Euro, GBPEUR, GBPUSD, House Prices, Pound, When to fix an exchange rate