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Interest rates rise again

Thursday, 10 May 2007 12:00 AM

The Bank of England has voted to raise interest rates today from 5.25 per cent to 5.5 per cent.

This is the fourth 0.25 percentage point rise in base rate since August 2006. Interest rates are now at their highest level since April 2001.

The move was widely anticipated by economists and experts in the property market, though the reaction to the rise in interest rates has been varied.

The National Association of Estate Agents (NAEA) said the rise would lead to house prices slowing to "natural levels".

"The market has picked up over the last couple of months after successfully shrugging off the January base rate rise," commented Peter Bolton King, NAEA chief executive.

"It is likely that this latest increase will be the one to slow the national market down to more natural levels. We certainly don't expect to see a slump in the foreseeable future, however."

Mr Bolton King added today's interest rate rise would affect some of the UK's regions more than others.

"Breaking down the picture regionally, there will be marked variation in the reaction of local markets. In areas where property is still scarce we expect this month's rise to be absorbed in a similar way to January's. This, of course, is little comfort to areas that have been struggling recently, which will no doubt feel the pinch," he concluded.

The Royal Institution of Chartered Surveyors (Rics) agreed with the agents' view of today's rise adding to the slowdown.

"Today's rate rise will reinforce the slowdown that is already underway in the UK housing market. Housing demand and sentiment in the market will weaken as households digest the increase in their mortgage bills, and first time buyers realise that they can't afford to borrow as much as before," commented David Stubbs, Rics senior economist.

"However, the higher proportion of fixed-rate mortgages taken out by recent first-time buyers should, for now, shield the new entrants to the housing market from the shock of higher rates."

New homes specialist SmartNewHomes.com was far less confident the impact of today's decision would be swallowed by the property market.

"First-time buyers can no longer keep up with rising house prices, higher interest rates and the extortionate arrangement fees charged by some lenders," argued David Bexon, SmartNewHomes managing director.

"The absence of this group of buyers will not only drastically affect the market but also have a detrimental effect on people's future prosperity.

"The decision to raise interest rates to 5.5 per cent will immediately put the brakes on an already uncertain market, fuelling the likelihood of a dramatic slowdown over the coming months."

Property portal FindaProperty.com also warned today's rise "may prove a step too far" adding the property boom was not "unstoppable".

However, looking further ahead some experts are saying interest rates are not set to rise again.

"The market is fully discounting another Bank rate increase to 5.75 per cent and so this is already priced into most fixed-rate mortgages," explained Ray Boulger of mortgage adviser John Charcol.

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