Rise deals brittle market a further blow as prices fall

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Although widely predicted in the City, yesterday's 0.5 per cent rise in base rates was roundly condemned by mortgage lenders and estate agents as delivering another unnecessary blow to the brittle housing market.

The threat to the recovery was underlined by figures from Britain's biggest lender, the Halifax building society, which showed that house prices fell by a seasonally-adjusted 0.1 per cent in January from December to an average of £61,369. On Wednesday, the Nationwide Building Society said its own house price index had fallen 0.8 per cent, down £246 from the end of December to £53,499.

Home-owners, an estimated 1.3 million of them saddled with negative equity, are unlikely to see any real recovery in prices until the middle of 1996 at the earliest. Both the Halifax and the Nationwide are predicting at least two more base rate rises which could put mortgage rates up to just under 10 per cent by the end of the year. Borrowers are also facing higher bills as the Budget measures begin to bite.

On Wednesday, Labour renewed its attack on government policy, claiming the average cost of home borrowing will have risen by £899 in the 18 months to October. The estimate is based on the increases in mortgage rates averaging 0.7 per cent since April 1994 and a progressive phasing out of Miras (mortgage income relief at source). In addition, social security payments to householders who lose their jobs are to be trimmed back in October, forcing the vulnerable to take out insurance costs which Labour estimates will amount to an average of £281 a year.

The government cuts and fears of rising interest rates has kept first-time buyers away.

Both the Nationwide and the Halifax confirmed a continuing dearth of first-time buyers.

"The first-time buyer is holding back,'' said a Nationwide spokesman. While affordability has never been better, the perception of a house as an investment has changed. The house price-to-income ratio is excellent but we do expect two to four rises in base rates during 1995.''

On Monday, the British Bankers' Association reported a 10 per cent slump in the number mortgages approved for first-time buyers in the last three months of 1994.

According to the Halifax yesterday, prices were 0.4 per cent higher than in January 1994. However, the year-on-year rate is likely to moderate this month when a sharp rise in prices in February 1994 falls out of the equation.

"The underlying trend in house prices shows a very flat picture with no evidence of recovery," the Halifax said.

"However, recent movements in house prices remain consistent with our view that prices will rise by 2-3 per cent over the course of the year."

Bradford & Bingley, the U.K.'s seventh largest building society, described yesterday's rate rise as an "unwelcome blow" to the country's struggling housing market. Geoffrey Lister, the society's chief executive, said it would be compelled to raise its mortgage rates again if others decided to do so.