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LONDON - House price inflation has peaked amid signs higher interest rates are already biting and there is a risk of a correction starting this year if borrowing costs climb much higher, a Reuters poll shows.
The Bank of England left rates unchanged at a near six-year high of 5.25 percent on Thursday, as widely expected, but a majority of analysts predict another hike to 5.5 percent by end-June following a surprise quarter-point rise last month.
Median forecasts in a survey of 25 analysts carried out February 5-8 before the rate decision showed house price inflation at about 6 percent this year -- down from around 10 percent last year -- and then easing to just 3.5 percent in 2008.
An overwhelming majority of analysts -- 18 of 22 -- now say house price inflation has peaked. That compares with just 2 out of 32 analysts who said the property market had peaked in a similar poll carried out just three months ago.
January's rate hike has probably pushed affordability for many buyers -- particularly first time ones -- as far as it can go or even out of reach.
"Affordability factors are beginning to bite," said Stephen Lewis at Insinger de Beaufort.
That in itself may signal the end of this mini-boom is in sight, analysts say, with more modest house price growth in line with wage increases expected for at least the next few months. Average house prices have tripled since the mid-1990s.
"House price inflation has peaked," said Gavin Redknap at Standard Chartered. "There is probably some element of overvaluation in the market but there will be a slowdown just from the rate rises we have had."
Perhaps the most significant data backing up this view was an unexpected fall in December mortgage approvals to the weakest level since April. The fact that came before last month's rate rise could point to further weakening to come.
And though told mortgage lenders the Nationwide and Halifax both reported house prices rising in January, the rate of growth was subdued.
RATES COULD STIR TROUBLE
Another large majority -- 15 of 23 analysts -- said house prices were overvalued. The survey also showed a 15 percent chance of a significant house price correction at some point this year, up from 10 percent in the last poll in November.
Only 8 said house prices were fairly valued and none said they were undervalued.
Median estimates showed house prices were around 16 percent overvalued but factors such as immigration, which has helped fuel demand, makes it difficult to estimate.
Estimates of the percentage chance of a correction starting this year ranged from 5 to 75 percent with some saying risks lie to the upside given uncertainty about interest rates and the chance of several more hikes to come.
"Higher rates are starting to have an effect already, but it would cause serious damage if rates go to 5.75 percent," said Karen Ward at HSBC.
Median forecasts showed rates would have to rise to 6.0 percent to pose a significant threat to the housing market but much would depend on the timing of those hikes, analysts said.
"If the BoE were to raise rates several times in the next three or four months then that would change the dynamic," said Milan Khatri at the Royal Institution of Chartered Surveyors.
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