Signs show rate rises are starting to bite

Interest rates have continued to increase and are widely expected to rise again.

Although the minutes of last month’s Monetary Policy Committee meeting point to a unanimous decision to increase the base rate by 0.25%, there were discussions over whether that increase would go far enough.

Their concerns centred on medium-term inflationary pressures. If the MPC felt there’d be the need for another rise sooner rather than later, there was a strong case for a bigger hike in May rather than two rises in quick succession.

However, those MPC members considering a 0.5% increase decided to wait for data that will shed more light on the cumulative effect of the recent base rate rises.

While this does not hinge on house price inflation and market activity, it will certainly have an impact. It will be enlightening to see if the housing market will remain as strong in the second half of the year at it was in the first.

A 1% increase in interest rates would have an inevitable impact on affordability, particularly when borrowers are already stretched.

The threat of another rise is like-ly to play on house buyers’ minds and could see them adopt a more cautious outlook. And there are problems besides the expense of servicing mortgages. Stamp Duty and other moving costs are also piling the pressure onto consumers. A recent survey conducted for AA Financial Services indicated that the sums the public will spend on conversions could amount to as much as 90bn.

Although a fifth of the respondents said they wanted to make the most of the potential space in their properties, almost as many (17%) said they needed more room but couldn’t afford to move.

The survey also found that 18% of those converting their properties did so to make more space for their adult children, more of which are living in the family home for longer.

In addition, the Council of Mortgage Lenders has found that more than 40% of the first-time buyers who have entered the market since 2004 received financial help from their parents.

There has always been an element of parental assistance in first-time buyers’ purchases, but not on this scale.

Some 35% said they would need financial help to stand any chance of getting on the property ladder.

Although the market has continued to hold up in spite of the spate of interest rate rises seen since last August, the lower lending figures recorded in April indicate they are beginning to bite.

We should prepare for a leaner second half of the year in lending terms as the market looks tough for first-timers and next-time buyers and is set to get tougher.