The mini-budget - a tipping point?

The first reaction to the Chancellor's announcement was to welcome the cut in stamp duty. Few saw the sting in the tail - and what a sting it was.

It is a common misconception that the Bank of England sets interest rates. Yes, they take a lead, but ultimately the market decides and the mini-budget sent the bond market into a tailspin. The knock on effect is that we face the prospect of mortgage interest rates well above previous expectations.

A few weeks ago, this blog noted that historically, house prices and interest rates do not always go hand-in-hand. One or more other factors may have to come into play - a softening in demand for 'lifestyle' moves, a brake on bank lending and forced sales. So where do they stand now?

Softening demand

First time buyers will be hard hit by rising interest rates. People looking to move up the ladder are likely to have built up equity in their existing homes, seen their incomes rise and increased their savings. However, they need to sell and with fewer first time buyers entering the market, the number of transactions is likely to fall.

Bank lending

Headlines focused on the high number of mortgages withdrawn after the mini-budget, but this is temporary while banks work out the rates they need to charge. However, since monthly repayments are a key factor in determining affordability, banks will reduce the amount they will lend to any given applicant. So, a touch on the brake rather than a full stop.

Forced sales

Repossessions were a feature of the last two financial crises and contributed to the falls in house prices. Stricter lending criteria since 2008 has seen the number of households with arrears over 10% of the outstanding loan fall to less than 30,000. Unfortunately, many households will come under pressure but the banks are now in a better position to favour forbearance over foreclosure.

Will prices fall?

Economists and industry experts vary in their predictions from zero to a 15% fall. Much will depend on the level at which interest rates settle, which in turn will be dictated by the market reaction to the coming details of the chancellor's Plan For Growth.

There remains the issue of the chronic lack of homes for sale. Only over the coming months will we see where the competing pressures balance out.

Buy to let investors

2000 to 2007 was undoubtably a boom period for buy to let. Throughout that time, mortgage interest rates averaged around 5.5%. The maths worked then. They still work now.