Bank of England warned 7% interest rates shocking housing market.
There is “no need to panic,” according to a renowned economist, because Britain “is not in a 07/08 scenario.”
The Bank of England has been warned that raising interest rates to 7% could shock the British housing market and drive down average prices.
The Bank of England’s benchmark rate may need to increase another 2 percentage points to 7%, according to respected economist Allan Monks of JP Morgan, who said that some evidence pointed to the need for this increase as prices continued to rise.
Housing specialists cautioned that such a significant base rate increase by the Bank may spell “game over” for the housing market, with one mortgage broker predicting a sharp decline in average prices.
But a respected economist claimed that there was “no sign of any crash” and that Britain was “not facing a 2007-2008 scenario.”
In London, mortgage firm Lodestone’s managing director, Craig Fish, predicted that the mortgage industry would “tank completely” if interest rates reached 7%.
The housing market and the economy would suffer greatly as a result, he said.
According to Mr. Fish, borrowers are already in a panic because interest rates could reach 6%. “If you go to 7 percent, we will see a lot of properties come onto the market and people will be forced to sell,” he continued.
“I honestly believe that a drop in home values of 35% is possible if interest rates reach 7%. It’s going to be bad, in my opinion. Because the implications would be so severe, I do not think it would increase to 7%.
A base rate of 7%, which would be the highest level since 1998, was projected by economist Tom Pugh of consultancy RSM to “start to break things” and cause a more than 5% decline in housing values.
“Interest rates of 6% would be sufficient to cause a modest recession in the economy. However, even a slight recession would very certainly drain the economy of inflation. Therefore, I don’t believe you need to add that extra percentage point to cause an even bigger recession in the economy.
Additional rate increases could be “the straw that breaks the camel’s back,” according to Riz Malik, director of Southend-on-Sea-based independent mortgage broker R3 Mortgages.
According to Mr. Malik, Jeremy Hunt’s mortgage charter, which he reached an agreement on with a number of the largest lenders in Britain to allow people in need to move to interest-only mortgages, will prevent a housing crash and safeguard homeowners from foreclosure.
At the start of the year, he predicted that home prices would decline by between 10% and 15%. He also warned that if interest rates rose further, some homeowners would be forced into a situation known as negative equity, in which their debt exceeds the value of their home.
But National Institute for Economic and Social Research scholar Professor Abhinay Muthoo claimed there was “no need to panic” because Britain “is not in a 2007-2008 [Global Financial Crisis] scenario.”
There is no reason to panic, he said, according to The Independent. The financial crisis of 2007–2008 was a time of panic. We don’t exist there. However, those who are already in pain will get worse.
If rates rise to 7%, he claimed that upper middle class and wealthier households “will be just fine”. The impact on mortgage rates, according to Prof. Muthoo, would not be “crazy like double digits,” despite the fact that this would have “implications for mortgage rates.”
He demanded that the government act quickly to support individuals with lower incomes who are already suffering to pay rising food and utility costs.
“The Treasury needs to find a way to provide targeted support to the people who need it,” he continued.
To contain inflation, the base rate was increased by 0.5 percentage points two weeks ago, leaving homebuyers scrambling to keep up with escalating loan repayments.
By the end of this year, financial markets anticipate the Bank to raise the base rate over 6%, and Mr Monks’ comments have heightened concerns for the UK economy and household spending.
Mortgage holders were warned that fixed-rate deals could increase to 7% this summer after the average five-year fixed-rate deal surged above 6% on Tuesday for the first time since November.
Because they believe that raising interest rates could send the economy into recession, several experts have encouraged the Bank of England to reconsider using “out-of-control” interest rates to manage inflation.