News Column

Positive housing numbers add to pressure on Carney to increase rates

August 12, 2014

Phillip Inman and Hilary Osborne



The latest mortgage lending data has added to the Bank of England's dilemma over interest rates after a sharp rise in borrowing showed the property market had regained its previous momentum.

The number of mortgages increased in June by 4% on the previous month, suggesting that tighter borrowing criteria had only cooled the market for a few months.

The Council of Mortgage Lenders said a survey of the biggest lenders showed that 60,500 house purchase loans, worth pounds 10bn, were taken out during the month, an increase of 5% by number and 6% by value on May's figures. Compared with June 2013, the figures were 15% and 23% higher respectively.

More than half of those loans were taken out by home movers, although the number of first-time buyers showed a bigger month-on-month increase, making up slightly less than half of the total at 28,600. Chris Williamson, chief economist at Markit, said a continuing stream of positive data would add to the pressure on the Bank to increase rates.

Affordability tests, which force lenders to check applicants' outgoings as well as their income to ensure they can afford repayments if interest rates increase, appeared to damp the market after they were imposed in April.

The central bank is under pressure to increase rates in response to the booming economy and the sharp increase in the number of people in work. Rising house prices have also triggered calls for an increase from the current historic low base rate of 0.5% to deter buyers and take the heat out of the market.

Mark Carney, the Bank's governor, is expected to say tomorrow following publication of the Bank's quarterly inflation report that a house price crash remains a risk to the recovery and policymakers must be vigilant to prevent prices getting out of control. Carney has previously argued that keeping house prices in check is possible using regulatory tools such as stricter affordability tests.

While some surveys have indicated that more sellers are putting their homes on the market to take advantage of recent price increases, especially in the south east, which might keep the market from overheating, Carney could be faced with the prospect of intervening again with even tighter affordability tests or increasing rates.

The CML figures showed the average first-time buyer borrowed 3.47 times their gross income to fund their purchase, compared to 3.46 in May, while the typical loan size increased by more than pounds 2,000 to pounds 123,865.

The typical gross income of a first-time buyer household also rose, to pounds 37,000 from pounds 36,500 in May.

Investors' appetite for property continued to grow, with the CML reporting a 23% year-on-year increase in the number of buy-to-let loans.

While the number of landlords remortgaging was up by 23% on June 2013, at 7,250, the number of owner-occupiers choosing to switch lenders was down by 8.2%, to 23,600.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said the figures suggested the new rules brought in with the mortgage market review (MMR) had not been detrimental to buyers.

"However, one area of the market which is subdued is remortgaging - all the more surprising when you consider the excellent rates available and the threat of an interest rate rise," he said.

"One can only assume that homeowners are either struggling to remortgage because of MMR or think it will be difficult, so aren't bothering to apply in the first place.

"Buy-to-let continues to grow as investors seek better returns than they can earn on cash and more certainty than the stock market . . . Investors are benefitting from cheap mortgage rates, less strict criteria and plenty of demand from tenants."



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Source: Guardian (UK)


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