The Bank of England surprised the mortgage industry last month with its shock decision to increase the Base Rate (BBR) by a quarter percentage point – the third rise in a five-month period.
The move saw the BBR hit 5.25 per cent for the first time since May 2001, and many are now questioning the impact of the recent hike – as well as any impact of further increases could have on borrowers, especially first-time buyers (FTBs) and those on variable rate mortgage deals.
While sceptics may dismiss any housing crash as scaremongering, speculation that interest rates could reach 6 per cent by the end of the year, coupled with rising houses prices has prompted fears that the market could see a downturn or certainly a slowdown as affordability becomes a growing concern.
Feeling the squeeze
Nick Gardner, director at Chase de Vere Mortgage Management, says FTBs are feeling the squeeze, but doubts the recent BBR hike will have a negative impact on the market. He says: “First-time buyers are being hit with a double whammy of rising interest rates and rising property prices so they are continuing to be squeezed out of the market.”
James Cotton, mortgage specialist at London & Country Mortgages, says other factors such as energy prices have also had an impact. He says: “Three rate rises in quick succession will most certainly have an impact on the market and could lead to some people paying £70 to £80 more a month – which is a significant amount of money. Add this to proposed council tax rises and the growing cost of fuel, and many people are starting to feel the pinch and question what they can afford.”
However, despite an overall increase in the cost of running a home, Gardner admits that the FTB market continues to grow. He says: “Rate rises were the last thing that they needed, but the hikes have had little impact on house price growth so far and are unlikely to, given that so much of the demand for housing is coming from buy-to-let investors and second, third and fourth-time movers, who have plenty of equity to use as a deposit.”
Predicting slower growth
Gardner’s view is backed by a recent report from the Centre for Economics and Business Research (CEBR). Its findings suggest that interest rates rises would not have a negative impact on the cost of housing and that prices would rise by 7.6 per cent, although it does predict slightly slower market growth over the next two years.
However, despite suggestions of continued market growth, affordability remains a concern for many FTBs. According to figures from the Council of Mortgage Lenders (CML), the cost of getting on the property ladder continues to squeeze many FTBs as income multiples reached their highest level ever in November – 3.29 times the average FTB household income.
If this trend continues, surely getting on the property ladder will prove too great a task for many FTBs? Maybe so, but it seems that FTBs are not deterred by affordability constraints, as despite the need to tighten the purse strings, the CML reported that the number of loans to FTBs grew by 5 per cent to 37,000 loans in November 2006 – up from 35,300 loans in October.
Nevertheless, FTBs still need to ensure they are not biting off more than they can chew. Michael Coogan, director-general at the CML, says: “Month-on-month we see affordability constraints becoming more pronounced for FTBs, and last week's interest rate rise will increase these pressures. But, FTBs are clearly still keen to get on to the property ladder despite the growing financial hurdles, and it is essential that anyone wanting to buy their first home should look carefully at their finances and take a realistic view as to whether they can afford the costs of home ownership if rates continue to rise.”
However, there could still be light at the end of the tunnel for FTBs. Cotton argues that if the interest rate hikes do what they are designed to do – curb inflation and slow down house price growth – it could lead to a more stable economic outlook for FTBs.
He says: “Interest rate rises could be good for FTBs in the long term if it does help to curb inflation and slow property prices allowing them to play catch up in terms of increased salary levels, therefore, putting them in a better position than they previously were. Ultimately, it is confidence in the housing market that dictates its success and failure.”
Gardner agrees: “As long as there continues to be more demand than supply – which is still the case in areas such as London and the South East, then prices will continue to rise, though it should be pointed out that in other areas, particularly the North, prices have been flat for some time.
“It really is a highly regionalised market and it is London and the South East that is driving up all the national average house prices so much.”
