BANK OF ENGLAND PREDICTS NO BIG SLUMP IN HOUSING MARKET

According to the chief economist at the Bank of England, the UK housing market will not suffer a sharp downturn despite higher interest rates and the economy heading into recession.

Huw Pill, a member of the Bank’s monetary policy committee that raised interest rates to 1.75 per cent last week, said that rising rates and a contracting economy over the next two years would slow house price growth but not on a par with the financial crisis, when the market dropped by 16 per cent in 2008.

“What we are trying to do with our interest rate rises is to slow momentum in the economy … part of that is operating through the housing market,” Pill told Bloomberg TV. “We would expect the market to cool but we think there is some resilience and we’re not going to see the dramatic downturns we’ve seen in the past.”

The Bank of England’s 50 basis point rate rise is intended to fight runaway inflation, which it said would peak above 13 per cent this year. Higher interest rates result in higher borrowing costs for homeowners on variable rate mortgages and will hit fixed-rate mortgages with a delay when loans are renegotiated.

House prices have continued to grow this year, albeit at a slower pace and with the first monthly drop in a year being registered last month, according to Halifax.

The Bank of England has raised interest rates six times in the past nine months to contain inflation, which is largely driven by the sharp rise in global oil and gas prices since the war in Ukraine. Pill said that tighter monetary policy was designed to cool inflation and would also work through different economic channels, including the housing market.

Markets are forecasting UK interest rates to peak in the middle of next year at about 2.8 per cent, after which the Bank will have to cut rates gradually to help support growth.

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Article originally reported in The Times: Friday 5^th August 2022