I shunned the Sun's News in Briefs again this morning. Instead - enticed by the free DVD on offer - I opted for the eminently reasonable Daily Mail.
Inside, I saw that National Institute of Economic and Social Research director Martin Weale is advocating raising interest rates above 8% in light of recent house price increases.
Such news will be greeted by outcry from the readership and personally, I think the interest rate cycle is probably approaching its zenith. But what seems like an absurd suggestion may not be quite as far-fetched as it first appears.
The buoyant property market has seen fantastic returns for the 11.7 million mortgage holders in the UK, and now many more people are choosing property as an investment for the future. The buy-to-let market is thriving, with the number of mortgages last year increasing by 48% over 2005, and consistently strong tenant demand.
Growth is continuing – in spite of three Bank of England rate rises since August. At rates of 5.25% during February, the average property rose by 1.8% according to one report.
Put simply, base rate increases have, so far, not been the disaster that some people were saying they were going to be.
Added to that, the IMF’s verdict last week on the UK’s “impressive” economic performance was especially encouraging. Such a positive outlook will further serve to maintain confidence for homeowners. The market still has room to manoeuvre.
What of additional interest rate rises this year then? Well, as we have seen already this year, another increase won’t affect the market unduly. Employment remains relatively high, and demand continues unabated. The public’s expectations are realistic and sensible, with a survey in December indicating that Britons are prepared for potential rate rises – and four fifths expecting higher rates in 2007 than 2006. Consumer confidence is clear from another recent survey, with three-quarters of respondents believing that house prices will continue to grow throughout the coming year. Meanwhile, forward-thinking lenders continue to offer attractive deals for customers.
Martin Weale is proposing rate increases to as much as 10%. The view of one of the Bank of England’s key advisers just goes to show how much room we have to play with.
I feel a return to the Sun’s News In Briefs is in order tomorrow. Not that another Littlejohn rant on how immigrants are ruining Celebrity Fame Academy will do anything for my sunny disposition.
Alan Cleary is managing director of edeus.
The views expressed are those of the author and not those of the company he represents.IFAonline
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