Roaring mortgage rates to keep a lid on housing demand as City eyes Bailey and Pill remarks

Roaring mortgage rates in response to markets betting the Bank of England will have to send official borrowing costs to over six per cent are poised to have kept a lid on housing demand.

Fresh figures out this Thursday from the Bank of England are expected to show the volume of mortgages approved in May improved slightly to 49,000 from April’s 48,700 figure.

Potential house buyers have shelved their homeownership dreams due to lenders passing on the Bank’s 13 successive interest rate rises. Last week, the monetary policy committee (MPC) shocked the City by raising borrowing costs 50 basis points to five per cent.

Inflation is stuck at 8.7 per cent, prompting traders to jack their peak interest rate expectations to more than six per cent, forcing mortgage providers – who price their products based on swap rates – to tighten borrowing conditions on their products.

The fact “that quoted mortgage rates continued to rise in May will have further weighed on demand for home loans, although this might have been mitigated by evidence of improving sentiment among households,” analysts at consultancy Oxford Economics said.

“Don’t expect any big rebound here, especially given rates repricing,” Sanjay Raja, a senior economist at Deutsche Bank, said. 

That reduction in demand in the property market is likely to have pushed house prices lower. The City thinks Nationwide’s house price index on Wednesday will show prices fell 0.3 per cent over the last month, while Deutsche Bank thinks they tumbled four per cent over the year to June.

A string of Bank of England rate setters will deliver speeches and sit on panels this week. Their remarks will provide clues on why they backed a bigger rate rise last week and where they think rates are headed over the coming months.

Governor Andrew Bailey at 2.30pm on Wednesday will contribute to a discussion at the European Central Bank’s forum on central banking in Sintra, Portugal, shortly after chief economist Huw Pill’s morning appearance at the same conference.

Departing MPC member Silvana Tenreyro will also divulge her thoughts on backing keeping rates unchanged at 4.5 per cent last Thursday at the same event on Tuesday. She will also take part in a panel hosted by the Resolution Foundation on Thursday.

Final GDP numbers for the first quarter are released by the Office for National Statistics on Friday are tipped to show no change from the initial 0.1 per cent growth estimate.

It’s very quiet on the corporate front as the City nears its annual summer shutdown.

London’s FTSE 100 last week shed 2.18 per cent to close at 7,461.88 points.