Housing market confidence has jumped by three per cent from 56 per cent in December to 59 per cent in January, according to the latest monthly ‘consumer confidence balance’ conducted by the Woolwich, Barclays mortgage arm. This is in line with historical data which shows that interest rate rises of circa one per cent are needed before consumer confidence is dented.

Andy Gray, head of mortgages for Barclays and Woolwich says: “Interest rate rises are clearly going to take some time to start denting consumers confidence. However, we do expect confidence to soften over the next few months if the predicted base rate rises in May and August happen. In addition other factors such as the inability of earnings to chase house prices much higher in some areas, is likely to act as a brake on the property market and house price inflation.”

The Woolwich tracked confidence data against historical changes to interest rates to understand how quickly rate increases affect confidence levels in the housing market. With at least two further interest rate rises predicted this year consumer confidence is likely to start to fall back in the coming months.

Between September 1998 and February 2000, the Monetary Policy Committee (MPC) increased the base rate from 5 per cent to 6 percent. At the beginning of this period, the hikes appeared to have little effect at all on dampening housing market confidence. In fact, over the period, confidence actually rose from 60 to 61 per cent.

However, once the effect of a cumulative 1 per cent rise in the base rate began to bite on households finances, the subsequent depressing effect on confidence is clear to see. Between February 2000 and September 2000, housing market confidence plummeted seventeen points, from 61 to 44 per cent.

In addition to the outlook suggested by the Woolwich confidence index, there are a number of other reasons to suppose that the rate of house price inflation can be expected to fall further:

• First, the ratio of average house price to average earnings is at a record level and as such, earnings need some time to catch up otherwise there is a risk of homes becoming overvalued.
• Second, the ratio of debt repayments to disposable incomes is currently at a high level.
• Moreover, in terms of the most recent data, the autumn boom in mortgage approvals, which was consistent with the strengthening of the market towards the end of 2003, has since been succeeded by the first signs of a declining trend. The number of loans approved for house purchase in December was 121,000, less than the average of 123,000 in the three months to November, suggesting that the recent surge in house market activity may be drawing to a close.