The Council of Mortgage Lenders (CML) has called for an early increase in the base rate and restated its view that the current rate of house price increases is not sustainable.
However, the CML still believes a combination of affordability constraints and modest increases in interest rates will produce a soft landing for the housing market.
The CML has acknowledged the Bank of England’s recent comments that the longer house prices continue to rise rapidly, the greater the chance there will be a sharp correction in the housing market.
Michael Coogan, director general of the CML, said: ‘The growth of house prices has been much stronger and lasted longer than we expected. But it cannot continue at the current rate indefinitely. We expect the Monetary Policy Committee to move on interest rates sooner rather than later.
He added: ‘An early increase in the base rate would help rein in the growth in consumer spending. Expectations of higher interest rates would also dampen conditions in the housing market and a little pain for borrowers now will help avoid the need for a more severe remedy later on.’
But Eddie Smith, director of business development at Verso, disagreed that a small rise in rates will have the desired effect.
‘A small rise will not make any difference. If you want to discourage people from over-stretching themselves, then you need more than a small rise in the rate. Artificially interfering with rates could lead to further rate increases much quicker than is needed, and that could put the housing market into a possible recession. Why risk it? It is clear some correction is necessary and will come in due course.’
Coogan pointed out that although affordability is becoming more of an issue, low interest rates have kept mortgage payments as a relatively low proportion of income. If rates did rise, there would be less volatility than in the past.
‘For the majority, mortgages will remain affordable as prices begin to slow and the housing market moves on to a sounder footing for the future,’ added Coogan.