More rate rises 'could hit house market hard

While few predict that the Bank of England's recent interest rate rise will deter those looking to buy a home or force people to sell, analysts warn that future rate rises could have a real impact on affordability.

This month's quarter-point base rate rise equates to a £27 increase in monthly mortgage repayments, assuming a capital and interest loan worth the average house price, £190,883.

Despite the dovish tone of the Monetary Policy Committee's August minutes, the Bank of England governor Mervyn King has hinted at further increases in the near future. Barclays Capital expects a quarter-point hike in November; others, such as Credit Suisse, expect a 0.5 per cent increase by the middle of next year.

Liam Bailey, head of research at estate agency Knight Frank, says he has not heard of anyone pulling out of a sale because of the recent rise. However, further hikes would really hit the market, he says. 'The rise we've just had was expected for the past three or four months. It's been priced into most people's expectations. I think 5 per cent, for most people looking to buy, would still not pose a huge knock. But when it goes beyond that - to 5.25 per cent - it suddenly becomes quite a jump. So it's the increase after the next one that's important - that would have a real impact on affordability.'

Ray Boulger, senior technical manager at broker John Charcol, agrees that the quarter-point rise does not pose much of a threat. 'We're just going back to where we were a year ago. But if we go above 5 per cent, we would see the housing market stall - prices would stop rising.'

However, Stuart Law of property investment group Assetz says that even one more quarter-point rise could affect the housing market because it will hit confidence. 'Homeowners and first-time buyers in particular will be feeling less confident, with affordability remaining stretched,' he says. 'Already buy-to-let investors are looking into raising rents, and it is likely the interest-rate rise will be passed on over time to tenants.'

Last week the Royal Institution of Chartered Surveyors reported that house prices in July rose at their fastest pace in more than two years. But Boulger urges buyers not to read too much into a single month's figures. 'I think we're going to see the rate of property rises slow - so that takes the pressure off the buyer. On that basis, you can afford to be more aggressive with your negotiating tactics.'