SAGA — Doing things properly

The state of the economy

The state of UK economy has become the talk of the town with purse strings being tightened across many families, writes Holly Thomas

Almost everybody in Britain is worse off than a year ago thanks to the decline in real earnings, after taking account of inflation, mortgage costs and taxes.

The stream of interest rate hikes are putting pressure on household budgets that were already under the strain of rising utility and council tax bills.

Homeowners have seen mortgage rates increase to crippling sums for those on variable rate home loans. The squeeze is likely to get worse when hundreds of thousands of borrowers with cheap fixed-rate mortgages have to switch loans. This year is going to be an expensive one for all the people who took out fixes ending soon.

Analysts say we have not reached the interest rate peak yet. Most believe that another increase, from 5.75 to 6 per cent, is now absolutely certain, after the higher than expected inflation figures that were published last week (Tuesday 17 July). Some expect them to rise as high as 6.25 per cent.

The Office for National Statistics reported that housing accounts for the majority of our wealth in Britain. But since the housing market has been so manic, many are wondering if and when the property boom bubble is going to burst - a million dollar question if ever there was one.

Although there is a general consensus that the market is slowing, demand for housing, requests for mortgages and house prices are generally in an upward phase - which are all reasons why we are probably not at the top of the UK interest rate cycle just yet.

New figures showed that mortgage lending hit a fresh peak of £34.2 billion last month. At the same time Halifax - Britain's biggest mortgage lender - raised its forecast for average house price rises.

It now expects a six per cent increase in property prices during this year - up from its previous prediction of four per cent.

The bank admitted it had been surprised by the strength of the market despite rising interest rates. But at six per cent, this would still be the smallest annual increase in house prices since 1995, and below the long-term average of eight per cent.

There is little doubt that the housing market is heading for cooler waters, however, economists are by no means predicting a housing market crash.

The average price in Greater London broke through the £300,000 barrier for the first time to £313,122. And prices are likely to keep growing, as Halifax and others suggest.

Last week the Office for National Statistics reported that gross domestic product (GDP) rose by 0.8 per cent in the three months to June. That was its sixth consecutive quarter of above-average growth.

The markets and the economy are inextricably linked and historically moved in cycles so at some point, there is going to be a recession.

But as for when, my sources say it's just too early to call.

Holly Thomas is Deputy Personal Finance Editor at the Daily Express and Sunday Express. Holly's views represent her own opinions and are for general information only. Always seek independent financial advice.

Paul Lewis is away