RICS Economic Brief - Dec 06

December 2006

Early November saw one of the most well flagged changes to interest rates since the Bank of England (BoE) became independent.

After August’s interest rate rise, which took the markets by surprise, everyone expected interest rates to continue their journey upward.

In the statement accompanying their decision, the BoE mentioned volatile but rising consumer spending, rising business investment, strong economic growth in UK export markets and the rapid increases in broad money and asset prices as the reasons behind the interest rate hike.

With economic conditions still firm, further rate hikes in the New Year are likely.

Commercial property

Occupier demand in the commercial property market expanded into October, as output in both the service and industrial sectors continued to firm. Rents in the retail and industrial markets showed some belated signs of improvement in October, indicating that a rental trough may have now passed. Annual office rents rose 4.6% in the year to October with retail at 3.5% and industrial rents at 1.3%.

Construction

The construction sector continued to boom as we moved into the fourth quarter, with the general picture continuing to be one of robust expansion. The construction industry grew by 0.6% in Q3, pushing the annual growth rate to the highest level in over a year at 1.7%, as the booming residential and commercial property markets weighed more decisively on activity levels than the August interest rate rise.

Residential property

The latest figures from RICS show that house prices rose for a twelfth consecutive month in October, up at the fastest rate since September 2002. The strongest rises in prices are in London and the South of England, on the back of a booming City economy. The November rise in interest rates to 5% will help cool the housing market, and at the same time promote economic stability.