Rate rise heralds a return to a buyer’s market

Property commentators are predicting a return to a buyers’ market following this week’s quarter-point interest rate rise – the fifth in less than a year – which is expected to stall house price growth.

The Monetary Policy Committee voted to increase interest rates to 5.75 per cent – their highest level for more than six years – in a move to bring inflation back in line with the Bank of England’s 2 per cent target. Last month Mervyn King, governor of the Bank, was outvoted on increasing the rate.

The widely expected increase is likely to accentuate the slowdown in property price growth that has been evident since the last base rate rise in May. It is also expected to drive more properties to market as sellers try to lock in gains.

Richard Donnell, director of research at Hometrack, the property information company, said: “This latest rate rise is likely to reinforce the weakening in demand for housing, which in turn will feed through into slower house price inflation over the second half of the year. With evidence of increasing amounts of new supply coming to the market, sales volumes are set to decline and we could well see the return of a buyers’ market over the next six months.”

Rightmove.co.uk, which lists 90 per cent of the properties for sale in England and Wales, said the average number of properties for sale per estate agent rose from 61 in April to 67 in May – a two-year high.

Miles Shipside, commercial director, said: “The market really started to cool a month ago, when we saw a 10 per cent jump in property for sale. This further increase in interest rates, combined with the onset of the [quieter] summer season, means sellers must price more aggressively to attract possible buyers.”

But softer house prices are unlikely to provide much comfort for first-time buyers or people looking to remortgage, who are facing significantly higher borrowing costs than a year ago. Someone with a £250,000 interest-only variable rate mortgage would now have to pay out £260 more each month than this time last year, according to Hamptons International Mortgages, the broker.

The Council of Mortgage Lenders estimates that 2m borrowers will come off competitively-priced fixed-rate deals over the next 18 months to be met with sharply increased monthly repayments.

Mortgage brokers say that current fixed-rate deals are already factoring in interest rates hitting 6 per cent this year.

“Swap rates are now at their highest since 2000 and most fixed rates look expensive compared with discounted variable rates and trackers, unless the bank rate goes beyond 6 per cent,” said Ray Boulger at John Charcol.

He added that the number of borrowers opting for fixed- rate deals is falling as they believe rates are nearing their peak, and it therefore makes less sense to pay a premium for the security of guaranteed repayments.

Charcol says the best two-year tracker mortgages on the market are around 0.35 per cent cheaper than the best two-year fixed rates, even taking the latest rise into account.

A fixed-rate mortgage will therefore only work out cheaper if base rates rise to at least 6.25 per cent and stay at at least that level for some time.

Peter Bolton King, chief executive of the National Association of Estate Agents, this week pressed the Bank of England to think seriously before raising interest rates again any time soon. “We urge the Bank to seriously consider the potentially adverse effect of any further interest rate changes and the consequences that this will have on the housing market, especially bearing in mind how vital this sector is to the UK economy,” he said.