Economic News

LONDON (ShareCast) - The chattering classes will have plenty to discuss at the dinner table this weekend, as Nationwide's decision to hike the cost of its fixed rate mortgages threatens the fragile recovery in Britain's housing market.

Cheers were heard Tuesday when the Department for Communities and Local Government (DCLG) said house prices rose 1.1% in April, hot on the heels of Halifax and Nationwide data showing increases of 2.6% and 1.2%.

There was also news from the Royal Institution of Chartered Surveyors (Rics) that its monthly house price balance rose to -44.1 in May from -58.7 the month before, the best read since November 2007.

New buyer enquiries rose for the seventh month in a row and at their fastest rate since August 1999, while the number of sellers is still dropping, now down every month for the past two years.

But Nationwide has reacted to rising swap rates with a big increase in the cost of its fixed rate home loans. The price lenders pay for their funds within the money market, the swap rate, directly affects the mortgages they offer.

With effect from Friday 12 June, the group's five-year fixed deal will increase by up to 0.86%, while two-year fixes will rise by up to 0.61%. Three-year products, meanwhile, will go by up to 0.26%.

The fear is that others will follow suit, making it far more expensive for homeowners reaching the end of their current deal to buy into the security of a fixed deal. Potential new buyers could also struggle to afford loans if mortgage costs rise too far.

That could derail the recovery in house prices just as the number of house purchase loans is starting to grow. There were 35,600 loans agreed in April, up 16% from the month before, according to Council of Mortgage Lenders (CML) figures, while loans to first time buyers rose 11% to 13,500.

Howard Archer, chief UK economist at IHS Global Insight, is already cautious. He points out that it's not uncommon to see months of rising prices when the overall trend is still down.

"Despite markedly rising buyer interest, we believe that the pick up in actual house purchases is likely to be gradual and fitful for some time to come given ongoing tight credit conditions and still relatively poor economic fundamentals," Archer said.

He thinks the Bank of England base rate will stay at 0.5% well into 2010, but bets that house prices will fall by another 10% from current levels to trough around the middle of next year.

That's more bad news for the one in ten homeowners in negative equity during the first quarter of the year.

A Bank of England survey, released Friday, estimates that between 7%-11% of UK owner-occupiers with a mortgage, as many as 1.1m homes, owed their lender more than their property was worth.

That figure could be considerably higher if the recovery stalls.