The Economist (20150808) by calibre

Author:calibre [calibre]
Language: eng
Format: epub
Tags: news, The Economist
Publisher: calibre
Published: 2015-08-06T17:26:33.739000+00:00

It strikes many as odd that rates rises are on the cards. Inflation is stuck at zero, far below the bank’s target of 2%. Wages are growing faster than at any time since 2010, but it is far from certain that such increases will continue. And when central banks have raised rates too early—as the European Central Bank did in 2011—they have done such harm that they have been forced to reverse course. Nonetheless, hawkish members of the MPC argue that unless rates rise soon, inflation will break through the 2% target before long.

Among those who are nervous about higher rates are mortgage-holders. According to the European Mortgage Federation, an industry body, in 2013 Britain had residential-mortgage debt worth 81% of GDP, the joint-third-highest in Europe. Worse, more than half of outstanding mortgages in Britain are variable-rate, meaning that they follow the Bank of England’s interest rate. If that were to rise by two percentage points, someone with a 75% mortgage on a house worth £400,000 ($625,000)—the average price of a pad in London—would see their annual repayments increase by £4,000, equivalent to 6% of the pay of the median mortgage-holder in the capital.

But higher repayments will not necessarily lead to a wave of defaults. Standard & Poor’s, a rating agency, points out that mortgage-interest payments as a percentage of income are at their lowest since records began, at 10.6%. Across the country only about 4% of mortgage-holders are really vulnerable, with their total mortgage repayments exceeding 40% of their gross income. As house prices have soared, a Bank of England report suggests, those borrowers who would otherwise have taken on the most debt have decided to rent instead. At the same time, stricter rules that came into force last year have curbed excessive lending.

Things will not get much worse for some time. Rates are unlikely to rise steeply, given the fragility of the world economy. And the government’s fiscal austerity programme will encourage the bank to keep rates low, lest demand fall too far. Mark Carney, the bank’s governor, reckons the base rate will settle at a level “about half as high as historical averages”, or about 2%. Add to that Britain’s shortage of homes, and the housing market does not look vulnerable. Standard & Poor’s predicts that house prices will rise by 5% next year and by 2.5% in 2017.

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