The last interest rate rise fails to
cool the housing market
Published: 09:03 Friday 29
September 2006
By: Lorna Bourke, Money Columnist
Pressure on the Bank of England's
monetary policy committee to put up interest rates sooner rather
than later increased with the news that last month's quarter point
rise in bank base rate to 4.75% has done nothing to cool house
prices.
'We expect interest rates to be
increased again in November, but there is little chance that
mortgage rates will increase to 7% as a result,' said Fionnuala
Earley, Nationwide's group economist.
Nationwide reported yesterday that
the market was 'unseasonably strong' with house prices increasing by
1.3% in September bringing the annual rate of house price inflation
to 8.2%, its fastest growth since February 2005. Annual house price
inflation for the same time last year was only 6.6%. The average
price paid for a property is now £169.413 compared with £167,721
in August 2005.
Strong demand from investors who
fight with first-time buyers for the same properties buoyed the
market but Nationwide pointed out that although first-time buyers
have difficulty finding a deposit, buying is still cheaper than
renting.
'A comparison of the cost of
servicing a mortgage loan against rental costs for similar
properties show that it can still be cheaper to buy than to rent at
current mortgage rates, but usually only on an interest-only basis,'
said Earley.
The typical loan-to-value ratio for a first time
buyer is 90%. Based on this, mortgage rates would need to increase
to around 7% before monthly outgoings on a mortgage exceed rent.
'The housing market was unseasonably
warm in September as August’s interest rate hike did nothing to
cool the rate of house price inflation,' Earley commented. 'A weak
patch this time last year, when prices fell by 0.2%, exaggerates the
annual increase, but the more recent three-month-on-three-month
series still shows a clear pick up in price growth since July.'
The price of a typical house is now
£169,413, almost £13,000 more than at this time last year and the
equivalent of a rise of more than £35 per day over the last 12
months. Housing market demand strengthened again in July with house
purchase approvals reaching 120,000 – almost 20% above the
long-term trend.
Estate agents continue to report
strong enquiries, but with fewer sellers willing to put their
properties on the market there is upward pressure on prices.
'Buy-to-let demand looks to remain
strong for some time to come,' Earley said. And investors are
gearing up in order to extend their portfolios. Loan-to-value ratios
on buy-to-let lending (including remortgaging) has drifted up since
the start of 2005. In the first half of 2006 almost two thirds of
gross buy-to-let lending was at a loan-to-value ratio of 80% or
more, compared with only 41% in the first half of 2005.
This is in response to strong tenant
demand. 'There is clearly a significant increase in tenant demand in
the UK coming from the large influx of immigrant workers across the
whole of the UK,' said Earley. 'There are also other, typically
younger, households choosing rental as a lifestyle choice. However
any move away from owner occupation as the tenure of preference in
the UK is likely to take a very long time.'
Earley pointed out that reports
suggest that parents and family are increasingly funding deposits
for their children. Nationwide analysis of mortgage lending data
suggests that borrowers increase their borrowing by around 10% when
remortgaging.
Based on a typical house purchase two
years ago, remortgaging now would release around £11,500 which, if
used to help an average first-time buyer onto the housing ladder,
would leave them only having to find a further £2,300 to fund the
average 10% deposit. And so the latest interest rate rise seems not
to affect the housing market or slow its progress.
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