Interest rate levels on hold after more evidence property market is slowing

Many first time buyers need to use 100 per cent of their annual salary for the deposit and stamp duty on a new property
12 April 2012

The Bank of England is set to keep interest rates on hold amid evidence house price growth is slowing and shoppers are tightening their belts.

The latest house price survey from the Halifax said prices increased by 0.4per cent in August taking the average for the UK to just under £200,000.

Prices have now risen by less than 0.5per cent in three of the last four months with predictions the annual growth rate will fall sharply over the next few months.

Buyers have been priced out of the market by five interest rate rises in the past year, taking the heat off property prices.

The hikes have pushed average montly mortgage repayments up by around £100, taking them to the highest level since the property crash of the early 1990s.

Mortgage repayments are now swallowing up 44per cent of monthly take-home pay for first time buyer couples, which is the highest figure for 17 years.

Earlier this year, City analysts were confidently predicting that the Bank of England of England would have to push the base rate up by a quarter point to 6per cent before the end of the year.

However, this is now off the agenda following a sharp fall in the official annual rate of inflation and the turmoil triggered by the credit crunch in the USA.

Banks and building societies are finding it harder to borrow money at favourable terms on the international markets, which means UK homebuyers face higher mortgage bills without any official rate rises.

Halifax chief economist, Martin Ellis, said: "This is the third month in the last four that house prices have risen by less than 0.5per cent.

"Whilst the market remains robust, this provides further evidence that house price inflation has slowed since the beginning of the year.

"The downward trend in house price growth is expected to continue over the remainder of 2007 as the five interest rate rises since last summer have an increasing impact on household spending and housing demand."

The Halifax said a pay squeeze is also affecting the ability of people to buy property.

It said annual pay growth is running at 3.3per cent, which is below the 4.4per cent rise in the Retail Price Index, which takes into account mortgage repayments.

The bank does not expect prices to crash, saying that a healthy economy and high levels of employment, combined with a shortage of both new homes being built and second-hand ones being put up for sale, should continue to support the market.

Chief UK and European Economist at Global Insight, Howard Archer, said: "The Halifax survey supports the overall impression that the housing market is gradually and erratically losing momentum as demand is increasingly pressurised by the rising affordability pressures stemming from higher interest rates, modest real disposable income growth and elevated house prices.

"Furthermore, a substantial number of homeowners will see their mortgage bills rise markedly during the latter months of the year as the cheap fixed rates that they took out two years ago expire.

"These growing affordability pressures are making it increasingly difficult for first-time buyers to get into the housing market, and also harder for existing house owners to trade up."

Property economists at Capital Economics believe the slowdown in price growth for the rest of 2007 will be followed by price stagnateion in 2008.

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