What does rising interest rates mean for UK house prices?

IInterest rates are on the rise, with further increases expected in the coming months as the Bank of England seeks to contain inflation – which is expected to exceed 10% this year.

That number – the highest since 1982 – is rightly a cause for concern, but in the housing market, 10% price inflation can persist for long periods.

Ultra-low interest rates have made mortgage loans cheaper, inflating a housing bubble that has made home ownership a distant dream for many tenants in parts of the UK.

So will higher interest rates help cool the country’s runaway housing market?

What is the latest data on UK house prices?

Figures released by Halifax on Friday, relating to a period before the Bank of England raised rates, show that there were not many signs of a slowdown in April.

Despite fears about the cost of living and huge increases in energy bills, house prices rose by 1.1 percent (about £3,000) from March.

The median house price hit £286,079 after the 10th consecutive monthly rise in prices, marking the longest period of increases in six years.

Halifax said a “space race” that began during the pandemic is likely to continue as people move from apartments in cities to larger homes in more rural areas.

The price increase in April was slightly slower than the 1.4% recorded in March, but the annual increase was still 10.8%, well above average wage increases.

Some analysts had expected the price increases to subside after the stamp duty holiday ended last year. This did not happened.

There are more signs that prices may not fall in the near future. The number of sales jumped 28 percent in April compared to January.

Realtor Chestertons said it saw a 31% increase in the number of people who registered to attend exhibitions at its London branches.

Chief executive Guy Gittins said there is now a “market of strong sellers” and that the number of sellers willing to lower their selling prices has dropped by 38% in the past year.

“The high volume of sales agreed in April created a challenging workload for lawyers and banks, which affected the time it took to finalize a sale,” he said.

Rising interest rates will affect some buyers’ ability to buy a home, but the effect may be limited.

What is driving UK house price increases?

Prices were inflated by the supply of cheap credit. Although rates are increasing, they still remain very low by historical standards. Buyers with a large deposit can still get a two-year fixed deal at an upfront fee of around 2%.

The supply of houses also remains an issue. There aren’t enough properties that people want in the areas they want.

There is now a clear dividing line in the market between homes, which are in high demand, and apartments, which are proving more difficult to sell in many areas.

The UK planning system has been blamed for slowing the process of building new properties and restricting supply.

The government’s proposals to radically overhaul the system and replace it with a zoning model that would automatically approve developments in designated areas have proved controversial. Some reports suggest that ministers will abandon the changes.

Large developers are also being criticized for hoarding large amounts of land that may not be used for construction for years. Meanwhile, developers profit from land tenure as values ​​continue to rise while the supply of new homes is limited.

These factors will not be affected by the increase in interest rates.

What’s Next for UK House Prices?

Housing experts are divided on where home prices will go next, but few are predicting a drop this year.

The question is how quickly prices will continue to rise.

Tom Bill, head of UK residential research at Knight Frank, said the recent period of price growth appears to have peaked last month.

“We don’t expect prices to come down, but presumably we’re in the last month or two of double-digit annual growth,” he said.

“The psychological impact of a rising base rate above 1%, higher mortgage rates, a cost-of-living squeeze and gradual supply reconstruction will all contribute to the slowdown as home prices return to ground later this year. ”

Halifax expects home price growth to slow further as affordability becomes more stretched.

“The home price/income ratio is already at an all-time high, and with interest rates rising and inflation tightening household budgets even further, it remains likely that the rate of growth in home prices will continue to rise. decrease by the end of this year,” he said. Russell Galley, managing director of Halifax.

Capital Economics is also forecasting a sharp slowdown in price growth towards the end of the year.

Leave a Reply

Your email address will not be published.