Both mortgage holders and lenders are getting the jitters, and you wonder whether this will hit demand and therefore house prices.
Last week research showed that consumers are googling terms like ‘mortgage holiday’ and ‘mortgage insurance’, suggesting there’s a lot of anxiety around the direction of travel.
If consumers were looking for reassurance from lenders they aren’t getting it too, as HSBC pulled mortgage deals on Friday amid fears of rising base rates.
The question is how high the base rate, and therefore mortgage rates, will rise.
CPI inflation stood at 7.8% in the year to April – albeit the direction of travel has been downward since October last year, when it peaked at 9.6%.
How harshly will the Bank of England act, as it looks to get inflation down to 2%? It’s hard to say, but it’s being signposted as a possibility.
At the end of May Jonathan Haskel, a member of the Bank’s Monetary Policy Committee, told a crowd in Washington DC: “The MPC remains committed to bringing inflation sustainably back to the 2% target, and that is what we will do. But to do this, further increases in Bank rate cannot be ruled out.”
In my mind the Bank could benefit from acting slowly, given that it will take a few months for rising interest rates to filter through to the inflation data.
It currently sits at 4.5% and is expected to reach 5.5% by the end of the year. Increases more rapid than that could spell trouble.
What does it mean for the property market if mortgage rates get out of hand?
Demand will be slashed, which will give cash buyers a big advantage. Those with substantial capital should be able to make a smart purchase, especially at the top end of the market.
Indeed, as we saw last week, it seems the cheaper portion of the market is the only thing that’s propping up prices at the moment, so the value is probably held elsewhere.
The higher the base rate is increased, the more that trend will continue – investors who already have substantial wealth will have a big advantage.
