The Bank of England Monetary Policy Committee’s (MPC) decision to maintain interest rates at 4.75 per cent this month has been warmly welcomed by the industry. Following the shock 0.25 per cent rise in August, the decision to hold the rate has been applauded by the majority of industry commentators.
Following the hike in August, the market saw a slight slump in sales, and a small drop in the price of a new home. Although a number of factors can be cited as the reason for the slow market conditions – including the traditional holiday season – uncertainty about future interest rates and the impact the recent rise would have on borrowers did prompt some concern.
Stuart Law, managing director of Assetz, says: “The Bank’s decision to maintain rates has prevented an over-zealous curb on consumer spending and inflation, which could itself have driven demand for higher wages, causing price growth and delivering more inflation.”
Law adds that a rise would have prompted panic among consumers, many of whom have already started to tighten the purse strings to meet the increase in payments.
He says: “House price growth is positive but sustainable, and a further rise this year would instill fear into homebuyers, with investors and first-time buyers in particular already feeling the pinch.”
ASUB
As well as instilling fear among consumers, David Bexon, managing director of SmartNewHomes.com, says a Base Rate rise could have had severe impact on borrowers who have stretched themselves too far. He says: “A decision to increase interest rates at this time could have proved detrimental, deterring buyers at a time when the Bank of England has reported approvals for home loans to be falling and pushing vulnerable groups into unmanageable debt. An increase in interest rates now could have seen young families trapped in unsuitable housing, unable to move up the ladder.”
Borrower relief
A number of reasons have been cited for the hold, including the falling price of gas and oil, as Ray Boulger, senior technical manager at John Charcol, explains. He says: “Borrowers will be breathing a sigh of relief at the news that Base Rate has been held for another month after nervousness over another increase heightened this week. The major relevant factors to have changed over the last month are the continuing sharp fall in oil prices and the prospect of significantly lower gas prices this Winter. With the oil price now a quarter below its peak of only two months ago and (in sterling terms) well over 10 per cent below its price a year ago, the Consumer Price Index (CPI) should soon start to reflect this, although many benefits will not be felt by consumers until next year.”
However, despite the Bank’s decision to hold the rate, speculation that a further 0.25 per cent rate hike is likely before the end of the year continues to dominate the market.
Jim Cunningham, senior economist at the Council of Mortgage Lenders (CML), says the industry should definitely expect an increase next month. He says: “Lower oil prices and evidence of steady, rather than accelerating growth might have improved the improved the outlook for inflation, but the MPC still seems more likely than not to raise rates to 5 per cent at the November meeting.”
This view is backed by Milan Khatri, chief economist at the Royal Institution of Chartered Surveyors (RICS), who says a Base Rate rise in November is most certainly on the cards and that the impact would mean a sharp cooling down in the mortgage market.
Khatri says: “A strong housing market has been sustained despite the August interest rate hike, and prices are rising at around twice that of average earnings. Positive momentum will continue in the property sector for the next few months as consumers’ finances remain strong and new job creation continues its upward trend. While overall inflation and wage rises in the economy are moderate, we expect a pre-emptive interest rate rise in November of 0.25 per cent.This will have a gradual cooling impact on the property market but high house prices will mean affordability conditions will remain poor for first-time buyers trying to access the market.
Rate rise impact
The continued speculation that a further rise is due before the end of the year has fuelled the flames of hesitant borrowers. Those first-time buyers and key workers unable or unwilling to take on such massive mortgage debt have already been left out in the cold by the boom in buy-to-let property investors snapping up a significant chunk of the suitable housing supply.
While many say another rate rise is inevitable, it is likely to have more of an impact on residential borrowers than commercial borrowers, according to Colin Bell, operations director at InterBay. He says: “A rise is on its way and is most likely to be next month before Christmas. While there are concerns as to what impact an increase might have on residential borrowers, there are indications that the business community could absorb a rise.”
