Thursday, August 05, 2004

The Bank of England raises interest rates yet again, now to 4.75%. Carry-traders leap for joy. The British housing bubble quivers?
The Bank of England has raised its base rate by a quarter of a percentage point to 4.75%.

The move, widely predicted by analysts, comes amid evidence of accelerating economic growth which could fuel inflation in the months ahead.

The rate rise will also be seen as an attempt to cool the UK's booming property market, and rein in soaring consumer debt levels.
This is the highest level rates have been at in the UK since late 2001 when the BoE crash landed them from 6.0% in January 2001 to 4.0% by November the same year.

British homeowners with variable rate mortgages -- that is, the vast majority of them -- will be paying more, too. Halifax, the UK's biggest mortgage lender, says a 0.25% rate rise on a �100,000 repayment mortgage means an extra �15 a month to the bank. The average British home now costs �161,831. The price-to-equity ratio in the UK is now around 2.3, meaning the average UK homeowner has a mortgage a bit over �90,000. �15 here, �15 there, and pretty soon you're talking real money.

The most important threat is to first-time buyers already squeezed to the wall. Half of all young (under 30) first-time buyers (40% of all first-time buyers) are putting down �12,000 on average. That makes for a lot of mortgages well over �100,000. This group is already a diminishing percentage of the housing market, down 40% in just two years. In Australia the housing bubble began deflating thanks to first-time buyers being eliminated from the market. One might see the same thing in the UK soon.

UPDATE: . . . "homeowners have now seen cumulative rises of �50 a month on a �65,000 mortgage since November last year, while those who are heavily mortgaged with a �200,000 loan are facing cumulative increases of more than �150 a month."


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