Bank of England rate hike would have little impact on house prices, Nationwide says

One economist warned a hike could lead to a slump in confidence as many households are not expecting rates to rise

Caitlin Morrison
Wednesday 01 August 2018 12:06
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Mark Carney signals ‘earlier’ interest rate hikes for UK

An interest rate hike will affect house prices only modestly, according to economists at Nationwide, with the vast majority of mortgages to remain on fixed rates for years to come.

The Bank of England’s monetary policy committee is widely expected to raise the base rate from 0.5 per cent to 0.75 per cent on Thursday.

Nationwide said: “Providing the economy does not weaken further, the impact of a further small rise in interest rates on UK households is likely to be modest.

“This is partly because only a relatively small proportion of borrowers will be directly impacted by the change. Most lending on personal loans and credit cards is fixed or tends to be unaffected by movements in the Bank rate. Similarly, in recent years, the vast majority of new mortgages have been extended on fixed interest rates.”

However, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, highlighted the fact than few households are expecting a rate hike this week. Citing recent research by Markit, which showed that just 30 per cent of UK households expect rates to rise in the next three months, below the 40 per cent who correctly anticipated last November’s rate hike, Mr Tombs said: “The committee’s next step could have an outsized impact on confidence, ensuring that house price growth continues to drift lower over the second half of this year.”

In its latest house price index, Nationwide said annual growth had picked up to 2.5 per cent in July, a “modest rebound”, with prices rising 0.6 per cent between June and July.

The lender expects prices to rise 1 per cent over the course of 2018.

Robert Gardner, Nationwide’s chief economist, said: “There was a slight uptick in annual house price growth in July to 2.5 per cent, from 2 per cent in June. Nonetheless, annual house price growth remains within the fairly narrow range of 2 to 3 per cent which has prevailed over the past 12 months, suggesting little change in the balance between demand and supply in the market.

“Looking further ahead, much will depend on how broader economic conditions evolve, especially in the labour market, but also with respect to interest rates. Subdued economic activity and ongoing pressure on household budgets is likely to continue to exert a modest drag on housing market activity and house price growth this year, though borrowing costs are likely to remain low.”

Sam Mitchell, CEO of online estate agent Housesimple.com, said the fact that price growth remains and the market subdue was “not necessarily a bad thing”.

“For the past decade we have ridden a rollercoaster of rising and falling prices, but right now it seems to tick up a little one month and tick down a little the next,” he added.

“We should bear in mind that we are in the traditionally quiet summer period for the property market, and the weather has been so un-British like that most people have been outside making the most of it, rather than viewing properties.

“Buyer and seller activity is likely to pick up significantly in a month or so. September is generally a very busy period for the housing market, and sets the tone for the rest of the year. We should also get a better idea how buyers are sellers are feeling, and whether the likely small rise in interest rates has had any immediate impact.”

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