At last the housing market shows signs of cooling. But will it catch a chill?

Growth is slowing in most regions. This is only to be expected as household incomes fall and a ceiling of affordability is reached, argues James Moore

House price growth has started to slow, according to the Nationwide Building Society (PA)

Some of the more conspiratorially minded observers may have nodded sagely when the Bank of England declined to join the US Federal Reserve and the Swiss National Bank in going for a half-point interest rate rise on the day of the last Monetary Policy Committee (MPC) meeting.

Instead, the UK’s rate-setting MPC stuck to its favoured quarter-point increase. “House prices you see,” may have been the response from those more conspiratorially-minded observers. “That’s all they care about. Protecting the market.”

Governor Andrew Bailey’s warning that the UK will suffer higher inflation for longer than other developed economies was just grist to their mill. Bailey has made it clear that British households will have to suffer some pain. Yet he declined to join the three external members of the MPC who rebelled and backed a half-point rise – a rise they have now advocated for three straight meetings.

Well, house prices have started to slow. Barely.

The regular update from Nationwide, the building society, showed they rose by 0.3 per cent this month. While that represents the 11th monthly rise on the trot, it was considerably slower than the 0.9 per cent recorded in May. The annual growth rate was still an eye-popping 10.7 per cent, but that too was down from 11.2 per cent in the year to the previous month.

Most regions are, at last, experiencing a slowing of growth if not a contraction. The bubble is expanding at a slower rate.

All this on the day that official figures showed UK households suffered another fall in real incomes in the first three months of this year. The fourth consecutive quarter that that has happened.

Clearly, the housing market’s defiance of gravity will have to end at some point. A correction is due. The driver of its buoyancy – a chronic lack of supply and the government’s dismal failure to meet its promises to build more – will crash into the affordability ceiling, which is fast approaching. Meanwhile, further interest rate rises are coming, which will further cool buyers’ ardour.

The Bank of England is going to have to bite a painful bullet – in the form of higher interest rates – however unpalatable that may be from the perspective of the economy. That’s because inflation is becoming entrenched.

This will inevitably make things still more expensive for new buyers. It affects people who already have mortgages much less, with 80 per cent of them on fixed-rate terms. But it will start to feed through to them eventually.

Remortgaging at the end of a fixed-term rate in this market is going to serve up a nasty shock. Some people are going to see their monthly bills rising by hundreds of pounds.

We have, in Britain, become accustomed to very low interest rates and dirt cheap credit. That is changing, and the change may be longer term than people realise.

While it will affect all borrowers, mortgage holders will bear the brunt. A half-point rise on a 7 per cent personal loan is painful, but it is less noticeable than a half-point rise on a 3 per cent mortgage.

Some unpleasant terms we might start to hear again include negative equity, for one, if we really are seeing the beginnings of an economic paradigm shift. Repossessions, too, on a much larger scale.

It is true that lenders, under pressure from their regulators, have got much better at dealing with distressed borrowers than the last time they found themselves under pressure. But the inevitable can only be delayed for so long.

One thing keeping all these wolves from howling too loudly is, of course, Britain’s robust labour market. If people are still getting their wages, then they will find a way to pay their bills, especially the mortgage. It is usually first in the queue. People will go without other things to keep a roof over their heads.

But what if that changes too and unemployment starts rising (as the Bank thinks it will next year)?

Even if the MPC isn’t as fixated on the housing market, its leading lights have good reason for concern.

There is a reason a housing market slump has featured prominently in previous stress tests that banks have been required to conduct to see how they might cope in the event that an unforeseen nasty comes along bearing its claws.

We are, of course, a long way from that happening. But economic waters are getting choppy. It would be as well to be sure our lifebelts are serviceable.