All set for slowdown

As rate rises take their toll, will we see the housing market crash that everyone has been warning us about for years?

The consensus is that there will not be a crash, rather a slowdown; the figures from the Nationwide confirm that. “Over the past six months, the strength of the London market has masked significant underperformance in much of the rest of the country,” says Richard Donnell, director of research at Hometrack. “In London, house prices are driven by the City and by international buyers. In the rest of the country, house prices are driven by average people on average incomes.” Some commentators believe that the Bank of England needs to hold off making any further rate increases to wait for previous rises to sink in. “There is too much focus by the MPC on one month’s stats,” says Max Ziff, head of Humberts Group. “The impact of a rate rise takes a while to kick in. It’s a bit like turning a supertanker. My fear is that if rates increase too sharply, they will overshoot the mark and we could find ourselves in a recession.”

So will the London market finally falter?

Most commentators believe that Central London prices will continue to rise strongly: King Sturge is forecasting a 12-month price growth of 20 per cent in 2007 and double-digit growth in 2008. However, some agents disagree. “The market is already cooling,” says Neil Chegwidden, head of research at Cluttons. “In Central London, where we used to have 10 to 15 people bidding on a property, we now have five to ten.” Although the headline figures for London look impressive, not all areas are growing strongly. June figures from Hometrack show that while prices in Kensington and Chelsea, Hammersmith and Fulham, Richmond and Wandsworth rose significantly, prices in Greenwich, Hackney and Haringey did not move.

At the very top of the market, though, the rate rise will have little impact. Brian D’Arcy Clark, of Savills, says: “The super-prime market – those houses costing more than £5 million – is primarily bought with cash, so a rate rise will have little effect. The prime market of £2 million to £5 million may see a degree of adjustment.”

Which areas of the country will be worst hit by the latest rate rise?

The market in most of London and the South East will be supported not just by money from the City and abroad, but by the acute shortage of housing. Areas likely to suffer most are those outside London that have recently had the most spectacular prices rises. “The worst effect will be felt in areas where price growth has been strongest recently, such as Northern Ireland, Wales and northern England,” says Liam Bailey, head of residential research at Knight Frank. “These are locations where prices have risen strongly but incomes are still ‘catching up’ with the rise.”

What are the prospects for prices outside England and Wales?

“Recent growth rates in Northern Ireland appear unsustainable,” says Fionnuala Earley, Nationwide’s chief economist. “Average earnings in Northern Ireland are still lower than the UK average, suggesting that affordability is deteriorating fairly rapidly.” However, the Scottish market, which has cooled only slightly, looks more robust. “Even after the growth seen over the past year, Scotland is still one of the least expensive markets in the UK,” Ms Earley says.

How will the rise affect first-time buyers?

David Bexon, managing director of smartnew-homes.com, says that first-time buyers “are staying away in droves”. Statistics from Barclays suggest that first-time buyers now spend almost a third of their total household income on their mortgages; in London, the figure is almost 50 per cent for people aged in their twenties.

Will there be a rise in repossessions?

Repossessions have been rising for two years, although they are at very low levels compared with the 1990s peak. The number of repossession orders has actually flattened over the past 12 months, but this is because there is a significant lag behind interest rate rises.

How will buy-to-let investors be affected?

Because first-time buyers are being kept out of the market, rental demand should remain high. However, it is likely that some buy-to-let investors, particularly those new to the market, could find themselves in trouble. Moore Blatch, a firm of solicitors, predicts a rapid rise in the number of buy-to-let repossessions as the housing market weakens and landlords find themselves unable to sell their properties quickly.

Is the worst over or is there more to come?

Most experts believe that a further quarter-point interest rate rise is on the cards. More importantly, how long will rates stay at 5.75 per cent or 6 per cent? “The whole outlook for the market depends on whether rates pop up to 6 per cent and then come back down again, or whether they stay there,” Mr Donnell says.

The Council for Mortgage Lenders says that two million people will come off fixed-rate mortgages in the next 18 months; Humberts suggests that 225,000 borrowers on fixed and discounted-rate loans will come off those deals in the third quarter of this year.“The best-casescenario for someone coming out of a £300,000 fixed-rate mortgage agreed in the autumn of 2005 into a new fixed-rate deal will be an additional £250 a month,” Mr Ziff says. “That is really going to hurt at the bottom end of the market.”

To find out what’s happening to house prices in your area, go to: timesonline.co.uk/buyingandselling

LOANRANGER

MORTGAGE lenders claim to be offering a lifeline to cash-strapped homebuyers with new short-term fixed-rate deals. After last week’s fifth successive rise in the Bank of England base rate, the 750,000 borrowers who took out fixed-rate loans two years ago shortly face sharply higher repayments.

With a further two million borrowers due to see their super-discounted deals run out over the next 18 months, a few of the larger lenders are seeking to lessen the repayment shock for customers with new-style fixed-rate offers. The rate is fixed for a year only: after that homebuyers pay a rate that tracks the base rate. Some offers, though, have a sting in the tail in the form of high arrangement fees.

“Many believe it is the wrong time to tie yourself into a two-year fixed deal when it looks like interest rates might be on their way down in the next couple of years,” says Jonathan Cornell, of Hamptons Mortgages.

“The Woolwich has a particularly good deal with a one-year fix at 4.99 per cent going on to a two-year tracker of 0.65 per cent above the base rate.” However, he says that not all offers are as good as they look. “Northern Rock is offering a very good 18-month fixed rate of 4.99 per cent. But with an arrangement fee of £1,995 and the tracker rate jumping to 1.99 per cent above the base rate, borrowers will face an interest rate of over 7 per cent, which is very close to Northern Rock’s standard variable rate.”

Lorna Blackwood