Interest Rates Dampen Mortgage Demand
Sep 22, 2006
The rise in interest rates last month has the real potential to affect affordability and thus decrease mortgage demand.
"While there is no danger of a property market crash, the Bank of England's move to increase the base rate by 0.25 per cent may strain affordability to near mid-2004 levels," Roger Botte from Capital Economics claimed.
The percentage of take-home pay being spent on a new mortgage rose from 26 per cent in 2001 to 45 per cent in 2004, reducing mortgage demand to a nine year low as a result of stretched affordability.
While mortgage affordability has mostly remained stable over the last two years, recent housing market demand suggests that affordability may already be at the top of households' comfort zones, said Mr Botte, something which could only be made worse by the latest interest rate rise.
He also claims that 0.25 per cent basis rise in rates will move the proportion of take-home pay absorbed by a new mortgage very close to its mid-2004 highs and although the market could handle the rise if it was seen as a one off, if further rises were expected, a real drop in mortgage demand could ensue.
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