Tomorrow, Rightmove, which surveys estate agents, will publish its latest monthly report. It will say that, while house-price growth in June has remained strong, there has been a noticeable slowdown in the past two weeks. The price of terraced properties, which are popular with first-time buyers, has actually fallen; the number of people hoping to move has dropped by 10% and the supply of properties has increased.
Last week, the Council of Mortgage Lenders (CML) announced that total mortgage lending fell by £1 billion last month — the first drop for four months. Michael Coogan at the CML said: “This survey and other recent data suggest the market may have begun to slow down. Reduced affordability, exacerbated by the cumulative effect of rising interest rates, is acting as a natural brake.”
Mervyn King, the governor of the Bank of England, also put homeowners on alert for a slowdown — or even house-price falls. He said: “The ratio of house prices to earnings is at levels that are well above what most people would regard as sustainable in the longer term. There are a few early signs from surveys of a slowdown in the housing market. After the hectic pace of prices rises over the past year, it is clear that the chances of a fall in house prices are greater than they were.”
Commentators are divided on whether prices will actually fall. Some suggest they could drop by 30% in the next few years; others think the pace of growth will slow down, perhaps to zero, and then stagnate for a number of years.
Whatever happens, experts suggest that buyers entering the market expecting the strong growth of the past few years should think again. King said: “Anyone entering the housing market, or moving, should consider carefully the possible future paths of both house prices and interest rates.”
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The City expects interest rates to peak at about 5% or 5.5% next year as the Bank tries to head off inflation, fuelled in part by the housing market. This would add £83 a month to the cost of a £100,000 interest-only mortgage.
Anyone who cannot afford a rise in rates should fix their mortgages. But borrowers who are prepared to take a gamble should think twice because fixed rates have been rising. Last week, Nationwide and Portman raised their fixed rates.
Britannia and Mercantile building societies are both offering two-year fixes with a rate of 4.99%. The best two-year discount, from Newcastle, is 4.05% — although it has not yet raised its rates in response to the Bank’s last quarter-point increase. The base rate would have to rise by 0.75 percentage points before you would be better off with the fix.
If you want longer-term security, mortgage brokers recommend five-year discounted caps over fixed-rate products.
Derbyshire and Coventry building societies have deals that are capped at 5.99%. The current pay rates are 5.25% and 5.35% respectively, compared with the cheapest five-year fix at 5.49% from Britannia.
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Brokers also recommend that homebuyers reduce their debt by making regular overpayments, especially if house prices stagnate. Many lenders allow you to overpay by up to 10% a year.