The annual rate of house price growth picked up slightly in October to 2.5%, from a revised 2.3% in September.
Nevertheless, annual house price growth remains within the 2-4% range that has prevailing since March. Low mortgage rates and healthy rates of employment growth are providing some support for demand, but this is being partly offset by pressure on household incomes, which appears to be weighing on confidence. The lack of homes on the market is providing support to house prices.
Economic growth was a little stronger than expected in Q3, increasing the likelihood of a rate rise on 2nd November (most likely to 0.5% from 0.25%). But, providing labour market conditions do not weaken significantly, the impact of a small rate rise on most UK households is likely to be modest.
The proportion of borrowers directly impacted by a rate rise will be smaller than in the past, in part because the vast majority of new mortgages in recent years were extended on fixed interest rates. The share of outstanding mortgages on variable rates (and which are therefore likely to see an increase in payments if the Bank Rate is increased) has fallen to a record low of c40%, down from a peak of c70% in 2001.
Moreover, a 0.25% increase in rates is likely to have a modest impact on most borrowers who are on variable rates. For example, on the average mortgage, an increase of 0.25% would increase monthly payments by £15 to £665 (equivalent to £180 per year).
That’s not to say that the rise will be welcome news for many borrowers. Household budgets are under pressure from the fact that wages have not been rising as fast as the cost of living. Indeed, in real terms (i.e. after adjusting for inflation) wage rates are still at levels prevailing in 2005.