They predict that bank rates will stay between 4.75% and 5.25% and UK house prices to rise 4-5%.
As 2006 draws to an end, following an active few months for the Monetary Policy Committee (MPC), Ray Boulger, senior technical manager at John Charcol, forecasted:
Bank Rate in 2007
“The two increases in bank rate since August reflect the MPC’s concern over inflation generally and comments from The Governor, Mervyn King, indicate the MPC is uncomfortable with the current level of house price inflation. Although the recent rate rises haven’t yet produced a slowdown in the rate of increase in house prices, it is too soon for them to reflect the impact of the November increase. Furthermore, at this time of year seasonal adjustments to the Halifax and Nationwide indices distort the monthly headline figures upwards and the actual increases are significantly lower than the seasonally adjusted rates. The real increases are about 1% less over the last 3 months than the seasonally adjusted figures.
“Economists’ opinions vary widely on where bank rate will end in 2007, with forecasts ranging from 4% to 6%. However, based on the interest rate futures market, the consensus is that bank rate will see one further increase to 5.25% and end the year there. A move to either 4% or 6% in the space of only 12 months would have a significant impact on the housing market and unless we experience a major economic shock in 2007 it is hard to see the justification for a move on this scale.
“In a speech as recently as 27 November deputy governor Rachel Lomax highlighted the risks to the economy of raising interest rates too far, encouraging the view that bank rate is at or close to its peak for this cycle. This suggests that the MPC will wait some months to see the impact of the two recent bank rate rises before seriously considering another increase. The impact of the two recent rate rises on borrowers, plus the large increases in energy bills for all consumers, indicates a slightly softer economy later in 2007, even without another rate rise, and this may well allow a small fall in Bank Rate to end the year at 4.75%.”
Property prices in 2007
“According to CML figures, approximately two thirds of all new mortgage borrowers in 2006 chose a fixed rate. However, over 50% of all mortgages are on a variable rate and most borrowers who bought a fixed rate only fixed for 2 years. Therefore interest rate increases impact on a majority of borrowers straight away and most of the rest within two years. On a typical new repayment mortgage of £110,000 the combined increased cost of the two recent rises is about £400 p.a. and the 25% of borrowers with an interest only mortgage will pay an extra £550 p.a.
“The annual rate of house price growth is currently around 9% but is likely to start slowing as the interest rate increases bite. The year on year figures will progressively see 2006’s strong growth fall out and be replaced by slower growth in 2007, resulting in the figures easing back over the course of the year, to end it with an annual rise of around 4.5%.”
What’s in store for first time buyers?
“The good news for first-time buyers (FTBs) is that some lenders are prepared to offer higher income multiples, in some cases up to around five times joint income. There is also more competition in the 100% and 100%+ market, resulting in better value for those borrowers without a deposit.
“In addition, some lenders have developed special mortgages targeted at FTBs. Some of these, such as some shared equity schemes, have been developed in conjunction with the Government but others, such as rent-a-room schemes for those taking in one or two lodgers and mortgages allowing parents to join in, are solely private sector initiatives.
“The main negative for FTBs is the ongoing increases in property prices, although the situation should improve in 2007 as the rate of increase slows to less than the pay increases many FTBs will achieve. It will continue to be difficult for most FTBs wanting to buy on their own, but those buying with a partner or friend may find it less difficult than they anticipate in view of the higher joint income multiples now available.
Charcol also points to the following to look out for in the property and mortgage market next year:
- Swap rate movements as well as Bank Rate changes. Swap rates are the key driver of the cost of fixed rate mortgages but they don’t always move in line with Bank Rate.
- An increased take up of offset mortgages as competition continues to narrow the gap between offset and non offset rates.
- New products from lenders to help first-time buyers, e.g. new shared equity mortgages and more lenders entering the 100%+ market.
- Lenders’ retention strategies.
- More lenders offering better terms on Buy-to-Let mortgages as they become increasingly comfortable with this type of lending.
- Stronger action from the Financial Services Authority to crack down on the shoddy practices still practiced by a minority of lenders and brokers.
- Whether the Government changes the planning regulations to facilitate an increase in the number of new homes built.
