The era of rising house prices and low interest rates could soon be at an end, say many leading economists. In a wake up call to Britain’s 18m home owners, they said rates could rise while house prices fall. Last week, the average house price went above \u00c2\u00a3200,000 after more than a 10 years of increases. This is mainly because interest rates have been low, meaning most people can afford their mortgages.<\/p>\n
But a 106-page document published yesterday by the Bank of England’s Monetary Policy Committee contained several warnings. The MPC, which sets interest rates, noted that inflation – the key factor in deciding the rate – has been ‘low and unusually stable’. But it warned: ‘The environment is unlikely to be so benign in the future.’<\/p>\n
Economist Stephen Nickell, a former MPC member, said: ‘In recent years, long-term nominal and real interest rates throughout the world have been at historically low levels. ‘The forces at work here are likely to moderate over the next decade and long-term rates will consequently rise. This will probably have a negative impact on asset prices.’<\/p>\n
Higher interest rates will be a blow for homeowners and particularly painful for people who have only recently taken out a mortgage. The average new home loan is at a record high of almost \u00c2\u00a3150,000. It is the second time this month a clear signal has been given that interest rates are on their way up.<\/p>\n
They have been raised three times since last August to 5.25%, the highest level for six years. Last week, Bank of England governor Mervyn King dismissed hopes that falling inflation would rescue Britain’s 11.7m mortgage holders from another rise. The consumer price index soared to 3% in December, far above the Government’s 2% target, but fell to 2.7% last month. He said: ‘Just as 3% inflation didn’t mean that the end of world was nigh, so 2.7% does not mean we can ignore concerns about inflation.’<\/p>\n
Giving his strongest hint that another rate rise is on the cards, he added: ‘I don’t think this is a time for counting chickens at all.’ The bank also expressed concerns about the country’s debt mountain of \u00c2\u00a31.3 trillion.<\/p>\n
It said secured debt – mostly mortgages borrowed against the value of people’s homes – has jumped over the past decade. In 1996, it was 75% of a family’s annual take-home pay, compared to 120% today.<\/p>\n
It said these larger debts could ‘amplify’ the impact of a fall in house prices. The news comes as it emerged yesterday that long-term mortgages lasting up to 57 years are tempting a record number of home-buyers. Financial information firm Moneyfacts said eight in 10 lenders are selling mortgages lasting 30, 40 or even more than 50 years.<\/p>\n","protected":false},"excerpt":{"rendered":"
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