The housing market has grown beyond all comprehension over recent years. Spurred by changing economical and social conditions, the housing market has continued to boom at unprecedented levels. In anticipation of rises during 2007, most lenders expected house price growth to reach 6-7 per cent for the year, while in 2006 house price growth reached 10 per cent. This level was again predicted for 2007, and despite recent Base Rate rises, it seems certain that house prices will continue their unparalleled growth. But what impact will this have?
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Urging caution
At the beginning of the year many institutions urged caution to the future forecasting a slowdown from the previous years’ findings. However, month-on-month the Council of Mortgage Lenders (CML) has reported record figures suggesting that the continued growth is no fad.
Following February’s record results, where gross mortgage lending rose by 9 per cent on the February 2006 findings, to a total of £24.6 billion, Michael Coogan, director-general at the CML, expected levels to continue to rise. He said: “Recent speculation about whether or not interest rates will go up seems to have had little impact upon lending levels and we still expect gross lending to reach around £360 billion this year.”
However, following the May findings, Coogan suggested that, although the sector was on course to complete the £360 billion target, the mortgage market should expect a number of re-adjustments as a result of Base Rate rises.
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Gary Styles, strategy, risk and economics director at Hometrack, agreed that the recent Base Rate rises would cause a slowdown, rather than a halting of house price growth. He said: “The housing market is at a significant turning point. House purchase mortgage approvals, although stronger than in April are 1.7 per cent lower than in the same period last year. However, high levels of remortgage activity have boosted overall approval levels as customers rushed to take advantage of attractive fixed rate mortgages.
“We can now confidently say that the last four interest rate increases are changing the tone and outlook for the mortgage and housing market. With interest rates expected to rise to 5.75 per cent in July we anticipate that total mortgage growth will slow to 10 per cent by the end of the year from around 11.2 per cent in May.”
Greater attention
Base Rate rises and the impact of any further rises have achieved greater attention as a result of the ongoing pensions crisis, the affordability issue, and the troubles currently being experienced across the Atlantic. However, at least with reference to the US market, it is not thought that any difficulties being faced their will have an impact on the UK market, due to the differing market dynamics.
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David Bexon, managing director at SmartNewHomes.com, admitted that the UK market would cool over the next few months as the Base Rate rises took affect. He said: “While average house prices have recorded positive price growth in June, and May has recorded the highest average price for a new home, consumers should not be fooled into thinking that prices will continue to rise at their current pace. The imminent threat of another rate rise in July is likely to result in a significant cooling of the market over the coming months.”
Levelling out
With the Base Rate expected to continue its rise it is no surprise that house prices are expected to level out. However, with no predictions that house prices will drop, the continuing affordability issue will only get worse. In a recent Question Time, Housing Minister, Yvette Cooper, confirmed that the government planned to push through plans for more affordable housing, and accused the Conservatives of thwarting attempts to increase home ownership by declining planning permission on many sites considered for housing regeneration, which would help ease the affordability crisis.
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With the American dollar reaching the two pound mark in recent weeks and continual changes in social and economic conditions, bought on by oil prices, the cost of living and other indices, it seems that the Base Rate will continue to fluctuate around the 5 per cent mark, with little evidence of any falls in the coming months. Instead it should be expected that the Base Rate will rise, at least once more this year, although the Monetary Policy Committee may take the view that enough is enough. Large organisations have already stated that there is no need for any further rises, but it looks likely. Time will tell of the impact.
