By Max Clarke
House prices rose again in March, by 0.5%, marking the fourth consecutive month of increase, the Nationwide house prices index shows.
But with inflationary pressures mounting, a rise in the Bank of England’s interest rate is expected in the coming months. A return to the average pre-recession rate of 4.5% would likely see typical mortgage payments increase by over £600
“The three month on three month measure of house prices, a better measure of the underlying trend, showed a modest rise of 0.6% in March. The outlook remains uncertain, but all things considered, this is unlikely to mark the beginning of a strong upturn in prices”, commented Nationwide Chief Economist, Robert Gardner.
Inflationary pressures and the likelihood of the Monetary Policy Committee raising interest rates in the coming months presents more uncertainty in the housing market. Combined with low consumer confidence and a rising unemployment, the housing market will continue to face challenges throughout 2011.
Said Gardner: “With the economic recovery expected to remain sluggish, the most likely outcome is that the property market will follow suit, with low transaction levels and prices moving sideways or modestly lower through 2011.”
A rise in interest rates would translate to rising mortgage costs. Currently comprising 85% of UK household debt, a rise in mortgage cost would see major increases to household expenditure, reducing spendable income and placing further stresses on retail and on the economy as a whole. If the Bank of England were to increase interest rates to 4.5% by the end of 2013 and wages keep rising at the current pace of 2.3% a year, this would take typical payments on repayment mortgages to 29% of take home pay.