Interest rate rise today 'could hurt housing market balance' - warning

A leading estate agent is warning that an interest rate increase today ould hurt the delicate balance of the housing market.

The comments - by Jeremy Leaf, the north London estate agent who is a former RICS residential chairman - comes following a new price index showing a modest rebound in house price growth, and ahead of this morning’s meeting of the Bank of England’s monetary policy committee, which sets base rate.

The Nationwide yesterday reported that there was a slight uptick in annual house price growth in July to 2.5 per cent, up from 2.0 per cent in June. 

This means that for the past year house price growth has remained in a relatively narrow band of between 2.0 and 3.0 per cent. 

“The slow growth in prices, which we have seen over the past few months, is continuing. Supply and demand remain broadly in line and the shortage of stock, as well as low interest and jobless rates, prevent a larger fall” says Leaf in response to the news.

But he cautions: “This balance is likely to be disturbed by even a modest increase in mortgage rates, even though relatively few borrowers will be affected by the change as they are on fixed-rate mortgages. But the direction of travel always seems to have an adverse impact on confidence and is likely to reduce low levels of transactions even further.”

The Nationwide also says today’s interest rate decision will determine at least the short term fortunes of the housing market.

“Subdued economic activity and ongoing pressure on household budgets is likely to continue to exert a modest drag on housing market activity and house price growth this year, though borrowing costs are likely to remain low. Overall, we continue to expect house prices to rise by around 1.0 per cent over the course of 2018” says Nationwide’s chief economist Robert Gardner.

The share of outstanding mortgages on variable interest rates (and which are therefore likely to see an increase in payments if base rate is increased today) has fallen to its lowest level on record, at around 35 per cent, which is down from a peak of 70 per cent in 2001.

“Moreover, a 0.25 per cent increase in rates is likely to have a modest impact on most borrowers who are on variable rates. For example, on the average mortgage, an interest rate increase of 0.25 per cent would increase monthly payments by £16 to £700, equivalent to about £190 extra per year” notes Gardner.

“While the impact for most borrowers is likely to be modest, it’s important to note that household budgets have been under pressure for some time because wages have not been rising as fast as the cost of living. Indeed, in real terms - that is, after adjusting for inflation - wage rates are still at levels prevailing in 2005.”