Interest rate rises finally put brakes on housing market

House prices grew at their slowest rate for months in April while mortgage lending also cooled, signalling that the market may be on the verge of a correction.

It came as potential buyers are forced to grapple with higher interest rates which have sent mortgage costs soaring in recent months.

The Bank of England raised rates by a quarter-point to 5.5 per cent this month - the fourth such move since August, leaving the cost of borrowing at a six-year high. It is widely expected to raise them again to 5.75 per cent or even 6 per cent this year as it struggles to control inflation.

The prices slowdown also followed a flurry of properties comingon to the market ahead of the introduction of Home Information Packs on 1 June. Many owners are selling now to avoid paying hundreds of pounds for the packs.

Howard Archer, chief UK economist at Global Insight, said: "The mortgage data provide further evidence that overall housing market activity is coming off the boil. It seems likely to moderate further over the coming months.

"May's interest rate hike adds to affordability pressures, and there is a very real risk of another rise before long. This which will be a major worry to potential buyers."

Homeowners with a £200,000 mortgage are now paying £127.57 more a month than they were before the August rate rise.

Repayments will go up a further £32.67 a month to £1510.65 if the Bank raises rates to 5.75 per cent.

However, London has shown signs of bucking the trend elsewhere in the UK as a shortage of available houses and strong demand from wealthy foreign businessmen and City bankers not needing mortgages drive prices higher.

Upmarket estate agent Savills this month said sales are still soaring in the capital.

The Building Societies Association (BSA) today said mortgages worth £3.91 billion were approved across the UK last month - eight per cent lower than a year ago, and the first fall since July 2005.

It was a 14-month low and well below the £4.6 billion of approvals in March and the peak of £6.1 billion in January.

The British Bankers' Association (BBA) said it had been the prospect of higher repayments that kept a lid on mortgage lending in April.

Lending rose by just £5 billion - down from £5.1 billion in March and well below the £5.4 billion average over the last six months.

Meanwhile, the Council of Mortgage Lenders (CML)reported a nine per cent fall in lending between March and April to £31.7 billion.

Property website Rightmove said asking prices rose at their slowest rate so far this year in April and early May as the number of houses up for sale surged ahead of the introduction of HIPs. Prices climbed just 0.4 per cent to an average of £237,361.