Rate rise will cool housing market

31 May 2007

One of Britain’s leading mortgage lenders, the Nationwide, is predicting that the latest rise in interest rates will “cool” the housing market.  However, the lender’s latest house price survey showed that growth remained “resilient” in May.

Nationwide’s figures show that annual house price inflation stood at 10.3% in May after a 0.5% increase in the month.  That 0.5% rise in house prices during May was down from April’s increase of 0.9%.  The mortgage lender says that the price of an average house now stands at £181,584.

However, the building society said that the high inflation figure was mainly down to slower price growth a year ago.  Nationwide stressed that the underlying trend was still slowing and warned buyers not to over-stretch themselves with large mortgages.

It said:  “Higher interest rates, with the threat of more on the horizon, should signal caution to those thinking about stretching themselves to get a foot on the ladder.”

Earlier this month, the Bank of England raised UK interest rates by a quarter of a percentage point to 5.5%.  It was the fourth such rise since August last year.  The Nationwide says this latest rise will cool both activity and price growth in the housing market.

According to the mortgage lender, the underlying picture for prices is showing “a clear downward trend as the effect of earlier increases in interest rates takes hold”.  Recently there has been a drop in mortgage approvals and inquiries from new buyers to estate agents.