The Bank of England left U.K. interest rates unchanged before Easter, perhaps to give the hard-driving mortgage market a brief respite for the religious holiday.

But we all know that just as fluffy bunnies and hollow milk chocolate eggs do little to underscore Easter's spirit, such is the effect of interest rate hikes on mortgage growth. The recent data on U.K. house price inflation and mortgage equity withdrawal show that the 75 basis point increase in rates thus far has done little to cool the housing market.

Will all of the sudden short breaks in the road be enough to slow the mortgage caravan without requiring a full stop?

It may be the case of too little too late. Kit Juckes, an economist over at the Royal Bank of Scotland, likened the spate of expected U.K. rate increases this year to a car that has been running too long without braking. Once you've had a period of extraordinarily low interest rates, as has been the case throughout Continental Europe and the U.K., getting back to average rates might not really make a difference. As a result, the market suffers asset inflation following this period of low rates.

Further rate hikes are widely expected in May. But how have the past rate increases yielded? According to Nationwide data, U.K. house prices increased by 9.3% on the year, down from 10.2% in February, but house prices increased by a seasonally adjusted 0.4% on the month to an average price of GBP177,083 ($349,950.86).

Data from The Land Registry further illustrates the increase. It said that house prices in England and Wales increased by 8.5% on the year, up from a revised 8.1% year-over-year increase in January. The Halifax index on U.K. house price data showed a similar story of year-over-year growth, breaking 10% for the first time in two years, reaching 11.1%.

Furthermore, lending to individual borrowers increased in February. According to the Bank of England, total net lending to individuals increased from GBP10.5 billion in January to GBP11.2 billion in February. The number of mortgage approvals remained constant at 119,000 in February. Mortgage equity withdrawal for 4Q06 increased to GBP14.5 billion, up from a revised GBP12.2 billion in 3Q06.

In fact, even the European Central Bank rate increases are doing little to curb inflation on the Continent. Issuance levels in all major European countries have grown over the previous year with the exception of Germany, France and Portugal. Spain and the Netherlands have grown by 38% and 30%, respectively, since 2005.

Despite the recent stats, let's hope that the expected rate increases will be enough to keep the markets in check.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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