First-time homebuyers found it tougher going in December as higher mortgages claimed 20.7 per cent of the average UK income, compared with 17.9 per cent a year ago.
According to the Council of Mortgage Lenders (CML), the five rises in interest rates from August 2006 to July 2007, meant that borrowers were paying 3.38 times a typical salary for their mortgage in December, up from 3.34 times a year earlier.
The CML said that although affordability had been stretched, the two reductions in British borrowing costs in December and last week, when the Bank of England cut the interest rate by a further quarter-point to 5.25 per cent, would ease the pressure. The Bank will release minutes from last week’s rate-setting meeting on February 20.
New inflation figures released this morning by the Office for National Statistics (ONS), have thrown the likelihood of an imminent rate cut into doubt as the pace of growth slowed.
While the Consumer Prices Index (CPI) inflation — the Bank of England’s target measure of inflation — rose to a seven-month high of 2.2 per cent in January, it was below the expected 2.3 per cent and compared with December’s 2.1 per cent
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The rise was due largely to higher fuel costs, which rose by an average 1.3p a litre to 103.9p as oil nudged $100 a barrel in the first month of the year.
Food prices, in particular fruit, such as grapes and grapefruit, also pushed up inflation, while strong sales of furniture added to pressure as retailers opted not to offer discounts on goods as steeply as they had last year.
The rise in furniture sales tallies with figures released overnight from the British Retail Consortium (BRC), which show UK like-for-like sales up 2.6 per cent to a four-month high in January and above the 0.3 per cent increase in trading during December.
A rise in both retail spending and the price of factory goods, which rose to a 16-year peak of 5.7 per cent, are likely to curb an immediate cut to borrowing costs.
Homebuyers have been hoping to take advantage of more cuts to the interest rate as the CML said that more borrowers have been changing their mortgages to tracker home loans that follow the interest rate as opposed to the more popular fixed-rate home loan.
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The CML said fixed rate mortgages fell from 77 per cent in June and July 2007 to 66 per cent in December when the Bank reduced the interest rate to 5.5 per cent. Goldman Sachs today changed its forecast of house prices and now expects prices to fall by 5 per cent in 2008, up from a 3 per cent forecast.
Tomorrow, the Bank of England will release its Inflation Report, in which it is expected to increase the short-term forecast on inflation, which could see growth exceed the 3 per cent benchmark, prompting Mervyn King, the Governor of the Bank, to write a letter of explanation to Alistair Darling, the Chancellor.
Since being granted independence in 1997, under the new Labour Government, the Bank has written a letter to the Chancellor only once, in April 2007, when CPI inflation reached 3.1 per cent.
The ONS also said today that Retail Price Index inflation, which is a measure of the price of goods and services in the UK and is used to calculate British pay rates, also rose from 4.0 per cent to 4.1 per cent, with fuel, again, the main reason for the rise.
The Chancellor is set to increase fuel duty on diesel and petrol by 2p a litre from April 1 but is facing pleas from a number of industry sectors not to raise the price of fuel.