The recent rise in the Bank of England’s base rate from 0.25% to 0.5% had been widely predicted. Some lenders had already raised their rates before the announcement, and others swiftly followed suit.
It was the first rise in more than 10 years and brought rates back in line with pre-referendum levels. The Governor of the Bank of England, Mark Carney, warned that further rises are likely over the next three years.
With inflation hitting 3% in September, above its 2% target, Carney noted that it was unlikely to return to lower levels without an interest rate cut. He added that “Brexit-related constraints” on investment and workers were also holding back economic growth.
While wage growth is currently lagging behind inflation, the Bank’s latest inflation report has projected that it will pick up to 3% in 2018, up from 2.25% in 2017; another factor in favour of a rate hike according to the Bank.
The pound went into freefall immediately after the Bank’s announcement. Reaction from the property market was slightly more subdued however, with some experts noting that while the rate rise was significant, a number of homeowners were on fixed rate mortgages and were consequently unlikely to be affected by it. Russell Quirk, CEO of eMoov.co.uk, described the rise as “water off a duck’s back for those with a fixed rate security blanket.”
The Bank of England has estimated that the move will lead to a rise in the cost of an average mortgage by £15 a month. However, the FT noted that with an overall decrease in the number of people who actually have a mortgage, those likely to be affected will be relatively small in number.
Terry Holmes, director at estate agents Beresfords, added that: “The much-maligned Mortgage Credit Directive has meant affordability checks are far more stringent than they used to be and deposit requirements higher, so the dreaded negative equity scenario is unlikely to be anywhere near the issue it was in the past.”
In the Residential Property Forecast published by Savills at the beginning of November, a more sobering appraisal of the long-term outlook for the property market was provided. Tempered by increased interest rates, Brexit, the weakened pound and a “subdued economy”, Savills predicted that house price growth would slow next year. It went on to state that house price growth would be limited to 14% over the next five years.
The report also referenced an important but slightly overlooked aspect of any rate rise: its impact on mortgage affordability. Lenders must now apply an interest rate stress test to ensure that borrowers are able to afford mortgage repayments if rates were to rise again. The report concluded: “With mortgage affordability increasingly constrained, any house price growth will be driven by earnings growth.”
Although Halifax’ latest House Price Index in October showed house prices increasing at their fastest rate over the last three months since January, the longer term outlook looks uncertain.