A survey conducted by the Council of Mortgage Lenders (CML), revealed that 60,500 loans, valued at a projected £10bn, were taken out by consumers harbouring intentions of using the money to fund their house purchases. Increasing 4% on the previous month, the swollen number of mortgages has raised doubts over the long-term efficacy of the constricting regulations imposed by the BoE last April.
With the bankís inflation report for the second quarter due on Wednesday, anticipation surrounding the timing of its interest rate hike is particularly high, and the governor, Mark Carney, is likely to maintain his unyielding stance on the matter. Carney understands the gravity of a house price crash, and the side-effects, including negative equity for many households and warped consumer confidence, would have enduring, detrimental effects on the economy. As such, he believes a delicate approach from legislators is the most prudent course of action, whilst adhering to the affordability checks he has forwarded in months gone by.
The stricter lending criteria which Carney enforced in Aprilís Mortgage Market Review were designed to curb the amount of loans distributed by lenders, in order to rein in the property market. The number of loans banks could give out at 4.5 times a borrowersí income was capped at 15%, whilst prospective borrowers were compelled to take ëstress testsí to see whether they could cope with a 3% rise in interest rates.
However, these measures have been undermined by the CMLís depiction of an accelerating housing market, with pressure on the BoE intensifying all the more given Juneís mortgage data which shows a 7 year high of home loans for first-time buyers standing at 28,600 ñ a marked 7.1% rise on the previous month.
Chris Williamson, chief economist at Markit, echoed this viewpoint, whilst offhandedly suggesting the direction he believes the housing market is heading. “A few more months of data showing the property market is booming and double-digit price growth will add to the pressure on the Bank,” he said.
Is an Interest Hike actually in the Public Interest?
Although there has been a surge in the number of sellers looking to cash in on record high house prices, it has become clear that more action must be taken. Whether that means Carney implementing even stricter measures to crack down on irresponsible lending, or the increase of the same base rate the Bank deployed to combat the financial crisis, which we are supposedly blooming out of into a period of economic growth.
If economic growth is what the UK is undergoing, than why is the bank appearing so furtive on the timing of an interest rate hike?
A rate increase poses risks to many mortgage policyholders, bar those with fixed-rate mortgages, as your monthly repayments will escalate, adversely affecting many householdsí standard of living. Those with standard variable mortgages will be at the mercy of their banks revised rate, and those with interest only mortgages will be in the worst financial position.
Yet, the scenario must rise where heat needs to be meaningfully taken out of the housing market, not the mercurial upswings and downturns the UK is accustomed to suffering. House prices are now bordering on exorbitant and an exponentially growing number of housing communities are becoming unaffordable for first-time buyers, as emphasised by the increase in the number of loans taken out by that particular group.
Moreover, the cost of house purchases, particularly in London & the South East of England, is deepening the wealth disparity between renters and homeowners, empowering agenda-driven private landlords, driving up the cost of temporary tenancy.
An increase in the BoEís base rate could stimulate sellers into action, increasing the amount of supply, driving house prices down.
Moreover, it would organically reduce demand due to increased borrowing costs, and not just amongst UK citizens. An interest rate hike will strengthen the pound against foreign currencies, and combined with the heightened investor & consumer confidence of a booming economy, foreign investment will become a far less attractive option. This reduced foreign demand, as a result of an interest rate hike, could help stabilise the property market all the more.
Whether the base rate is raised sooner or later, the fact remains that the majority of the UK public see homeownership as a key goal, and if excessive levels of borrowing is the only way to attain that goal, then so be it. It is down to the financial regulator to settle on the most judicious course of action, to combat such levels of borrowing, and given the CMLís data, that could be an imminent base rate hike.