What impact will a rise in interest rates mean?
It’s a question often asked of estate agents
Newly-revealed minutes from the Bank of England’s Monetary Policy Committee show its members were split on a potential interest rate rise.
It said two of its nine members voted for a rate rise earlier this month, in the first split vote on rates since July 2011.
The split decision is the first under governor Mark Carney’s tenure.
MPC external members Martin Weale and Ian McCafferty voted to raise the base rate from the five-year historic low of 0.5% to 0.75%.
For the two members, in particular, economic circumstances were sufficient to justify an immediate rise in the base rate, which directly impacts home loan and saving interest rates. With this in mind it points to a potential increase in interest rates early in 2015.
What would it mean for the housing market if interest rates increased?
Mortgage lenders have reported July was their strongest month since August 2008, suggesting the market remains robust despite new stricter rules being introduced over the way home loans are handed out.
If interest rates rise it will have a significant effect on increasing the cost of mortgages. This will deter prospective home-buyers, but it may also force some existing home-buyers to sell. The danger is that many homeowners are being protected by ultra low interest rates. If rates rise, this will make mortgage payments too expensive and they may be forced to sell.
It is important to bear in mind that interest rates are not the only factor affecting house prices. It is possible for interest rates to increase, but house prices continue to rise.
For example, if confidence is high and we experience a period of rising incomes then people may continue to buy, despite the rise in interest rates.
The supply of housing is also very important. A big factor in the current rise of UK house prices is due to the shortage of supply, which is pushing house prices higher.
However, in the current economic climate, we could expect higher interest rates to have a significant effect on reducing house price growth. Given low real income growth in the past few years, a rise in rates would have a big effect on household disposable income. The UK is likely to be sensitive to any change in interest rates.