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Sudden interest rate rise will hit recovery UK property market, it is claimed

The decision today (Thursday June 09) by the bank’s Monetary Policy Committee to leave interest rates at a record low of 0.5% despite inflation running at more than twice the target rate of 2% has not come as a surprise.

But it could be storing up trouble ahead for people with larger mortgages and first time buyers. ‘There are still serious concerns about consumer spending and the full effects of the fiscal tightening measures that were implemented in April are not yet fully known. However, if the economy turns a corner the MPC could be forced to make a series of sudden rate rises which could unbalance the housing market,’ said Jennet Siebrits, head of residential research at consultants CB Richard Ellis.

Nick Hopkinson, director of property company, PPR Estates, however, does not think rates will rise this year. ‘The Bank of England is clearly not going to be able to increase interest rates this year, even though inflation is running away from it. UK PLC is still very weak and any increase in borrowing costs would almost certainly tip the scales back into recession,’ he said.

‘The Government’s austerity cuts continue to bite, unemployment continues to move upwards and household incomes and cash flows will continue to come under increasing pressure for the remainder of 2011,’ he added.

Whatever happens, the effect on the property market is not going to be good. ‘The house sale market has virtually ground to a halt this spring with transaction volumes falling back to the lowest levels seen since the credit crunch outside London recently. I therefore expect house prices to fall by 5% this year, even if base lending rates remain artificially low,’ said Hopkinson.

‘If interest rates are forced up due to the MPC needing to retain credibility on its inflation management brief, then things will get a lot worse for many struggling sellers,’ he added.

According to Neil Chegwidden, director of residential research at Jones Lang LaSalle, the decision will do little to lift the mood in the national housing market but will help it to tread water.
‘The UK housing market has weakened since last autumn but has probably proved a little more resilient than many had expected during the first few months of 2011. London is bucking the national trend in prices but all regions of the UK are suffering from an even further decline in transactions,’ he said.

‘The key mood enhancing trends that the housing industry will be watching for are a pick up in transactions, a rise in mortgage lending and a boost in first time buyers. News that visitor numbers at new homes sales sites have increased during the first few months of 2011 is one positive sign, but whether these other indicators can follow suit is more questionable,’ he added.

The decision will, however, benefit first time buyers, according to Richard Barker, mortgage manager at the Norwich and Peterborough Building Society.