Quality Speaks For Itself

No change for UK interest rates… yet mortgage rates go up… what next for the housing market?

Posted in Financing by Ash on June 13th, 2008 11:59am

The Bank of England left UK base rates unchanged last month in it latest decision announced last Thursday. The decision to hold rates had been widely expected. Rising food and fuel prices pushed inflation to 3% in April, well above the governments’ target of 2%. Anyone who has witnessed the nearly daily hike in petrol prices will find it hard to believe that inflation is only 3%!

The MPC has already cut interest rates three times since December in an attempt to help the slowing economy. However, the economic slowdown and falling house prices had led some to call for another cut in rates to boost spending. However, in reality the bank had little choice with oil and commodity prices continuing to move higher, the Office for National Statistics announced today (9 June) that UK producer prices growth was at a record level. In May alone, the output prices for the sale of manufactured products grew by 8.9% in the year to 31 May.

The impact on UK house prices is clearly there for all to see with House prices falling as the credit crunch makes lenders reluctant to provide mortgages. The latest figures from the biggest mortgage lender, the Halifax, showed a 2.4% fall in house prices during May. On Wednesday, the Home Builders Federation called for a half-point cut in interest rates to 4.5%, saying a cut was “imperative” to avoid a severe housing market slowdown. It appears that this slowdown may already be happening. A couple of weeks ago a member of the QIS team met a Senior Board member of a major UK Housebuilder, who noted that whilst viewings at show homes were down 10-15% (not too bad by my estimation) that actual sales were down close to 60%. The message was clear, “the buyers are out there but lenders are not willing to provide mortgages” Lenders continue to monitor the market closely and are clearly looking to manage their application levels using rate changes. Last week two major lenders, Nationwide and Alliance & Leicester increased fixed and tracker rates by some 0.3%, despite their being no change in base rates. This follows, the Abbey who cut rates a few weeks back, to be the market leader, but promptly increased them when they were flooded by new mortgage applications. I suspect that we will see more of this in the coming weeks.

The outlook for European rates is no better with inflation (3.6%) still the main stumbling block for a cut in interest rates which have been kept on hold since July 07. Indeed announcing that rates were being held last week, Jean Claude Trichet, stated that there was the possibility that rates would need to rise in the near future to calm inflation before we ECB council would consider rate cuts.

We await the various central banks next move with interest.