UK mortgage growth dilutes rate hike

The rising popularity of fixed rate mortgages in the United Kingdom has lessened the immediate impact on the housing market of the interest rate rises we have seen recently according to Capital Economics.

Capital Economics, a leading economics consultancy firm, states the impact of a rise in interest rates on the property sector will be much more drawn out than we have seen in over the past few years and the full effects of monetary tightening not likely to be seen until sometime in 2008.

While the Bank of England base rate (5.5%) stands at its highest level for six years, mortgage approvals have fallen by only 6% since August 2006. If w compare this to a similar point in time, that of 2003/04, when rates had risen 1%, approvals were down by around 17% - a huge difference!

Ed Stansfield, property economist at Capital, was stated as saying the following: 'So far, in the face of recent interest rises, mortgage demand has held up well compared to the previous episode of monetary tightening,'

'The recent popularity of fixed rates means that fewer existing borrowers are immediately affected by higher borrowing costs. Therefore, the speed with which the adjustment to higher interest rates takes place may be slower than in the past, '

'A key channel though which monetary policy acts is via the impact of higher mortgage payments on household finances,'

'Yet if this transmission mechanism has been diluted, then there is a risk that interest rates may be raised further than in the past, exaggerating the impact on the housing market once current fixed rate deals expire,'