Homeowners to be hit by rate-rise blitz

Homeowners face a series of interest rate increases that could see the Bank of England's base rate rise from 4.5 to 5.25 per cent by the end of the year.

The Bank is widely expected to set the ball rolling with a quarter-point increase this Thursday, and economists and housebuilders fear an acceleration in coming months.

Concern is mounting that the housing market is still overvalued, despite four rate rises since last November.

The Monetary Policy Committee, led by Bank governor Mervyn King, is worried that mounting personal debt, which last week breached the £1 trillion mark, shows no sign of slowing. And there is also alarm that surging oil prices, which last Friday reached a 14-year high, will feed inflationary pressure.

Aggressive rate rises would be a strong signal for homeowners to rein in spending habits, but would anger Britain's industrialists by exacerbating the upward pressure on sterling, threatening to make British exports uncompetitive on world markets.

The Engineering Employers' Federation warned that undue haste in raising rates 'would spook the markets and would undermine the Bank's reputation for caution'.

Economists and British housebuilders are bracing themselves for a sharp fall in house prices once interest rate rises kick in, but are already speaking of rate cuts next year to soften the landing of the housing market.

John Callcutt, chief executive of housebuilder Crest Nicholson, said: 'I think we'll get a fairly abrupt fall in house prices. I think rates will hit 5.25 per cent by Christmas and in 2005 we'll see the first interest rate cuts. We don't want the market to crash - we want it to slow.'

Jonathan Loynes, chief UK economist at Capital Economics, said: 'The housing market is clearly overvalued if you look at prices, rate of increase or prices relative to earnings. That in itself doesn't mean we will get a sharp fall, but that is what generally happens. It's rare for house prices to fall in an orderly manner.'

However, surveyors and estate agents remain convinced that the heat has already gone out of the housing market, despite a surprise report by building society Nationwide last week that showed a 2.1 per cent rise in prices in July.

Nationwide's statistics, which put annual price inflation at 20.3 per cent, reflected prices agreed during June.

The statistics were attacked by some commentators as irresponsible. Nationwide's chief economist, Alex Bannister, defended them but said that they may have reflected deals struck before warnings from the Bank of England and others about the threat of a slowdown and possible price falls. The figures could also have reflected a pre-holiday purchasing rush. Bannister said he still expected house price inflation to fall over coming months.

The Halifax is due to release its house price index for July over the next few days. The Halifax and Nationwide indices do not always agree, but if upcoming Halifax statistics also record a sharp uplift in July, it would further strengthen the case for another rise in interest rates.

Ryan Emmett, an economist with the Royal Institution of Chartered Surveyors, said that information coming in from his organisation's members indicated definite signs of a slowdown.