How do Interest Rates and Inflation Affect The Housing Market?

by | May 23, 2022 | London housing market | 0 comments

It’s the news story that shows no signs of going away in a hurry. Exacerbated by several interrelated factors – the aftershocks of covid, the war between Russia and Ukraine, global supply chain issues and Brexit – inflation has hit a 9 per cent high, something the UK hasn’t seen since the early-1980s. Not only that, but consumer confidence is at a low last experienced around 1974. In response, the Bank of England has raised interest rates. The rate was 0.1 per cent in 2021 until an increase to 0.25 that December. And since then, it’s crept up again and again, with the most recent jump in May 2022 taking it to 1 per cent – the highest it’s been since 2009 when the country was reeling from the financial crisis. Further eye-watering rises are expected, with experts predicting as much as a 2 per cent rise by the end of the year. It’s likely that interest rates will continue to go up until there’s a downturn in inflation, but there’s no immediate likelihood of that, so for now we can only buckle up and hope for the best. But what exactly does this mean for property prices, mortgages and moving house? 

What is the Impact of Interest Rates and Inflation on Mortgages?

2021 was a banner year for the property market, thanks in large part to the stamp duty holiday prompting a rush of buyers eager to take advantage of it. A saving of up to £15,000 was available to buyers who managed to seal the deal before June 2021, and, unsurprisingly, property purchases reached a peak around that time, before returning to pre-pandemic levels once stamp duty was reinstated. Now, however, some of those buyers may find that their repayments are creeping up because, of course, mortgages become more expensive if interest rates rise. People on variable rate mortgages will find that their repayments increase commensurate with the rise in interest rates. A £100,000 mortgage, for example, ends up costing an additional £12 a month; possibly not an alarming figure until you take into account all the other expenses that will be rising (and often, as in the case of fuel bills, at far faster, higher rates than 1 per cent). The fixed mortgage, however, remains immune to the change in interest rates, at least until a particular deal expires. The advice for people on the verge of buying a home and taking on a mortgage (or remortgage) is to opt for a fixed rate deal so that they’re locked into the 1 per cent interest rate for a few years, since it’s likely that interest is only going to get higher for the foreseeable future. 

We already know that inflation  – usually measured by the Retail Price Index and the Consumer Price Index – is having a drastic effect on the cost of day-to-day living, consumer goods, groceries and fuel. And there’s another one to add to that list: it’s simply unavoidable that people getting a mortgage will have to pay more. For people in straitened circumstances, increased mortgage costs lead inevitably to property repossessions and tragic outcomes. At the moment, there are roughly nine million residential mortgages in the UK, around 10 per cent of which are trackers, with repayments linked to the Bank of England’s base rate. Those people will be instantly affected by repayment increases. And so will people with standard variable rate mortgages, who number just over one million (many people are automatically switched to standard rate variable mortgages by their suppliers once their fixed-rate deals are over). The rates for SVRs are established by lenders, but usually follow the base rate set by the Bank of England. Fortunately, 75 per cent of mortgages are fixed rate, so the majority of homeowners will not see any immediate rise in repayments. 

Impact of Interest Rates and Inflation on the Housing Market

Price rises were expected to slow down sharply once the stamp duty holiday ended, but it didn’t pan out that way – to the surprise of some experts, growth continued and the overall annual increase was a robust 10.8 per cent. Today, the expectation is not for house prices to fall but merely to grow at a slower pace. Already, this is observable. The increase in house prices in March was 1.4 per cent, whereas in April it was 1.1 per cent. It’s feasible that we’re coming to the end of an era of double-digit annual increases. Still, various drivers of house-price increases are still in place and these include: availability of cheap credit; the housing shortage; big developers buying swathes of land and then not building on them but sitting back and watching land value increase; the UK’s bureaucracy-heavy planning system. While all of this is ongoing, very few commentators predict a fall.

What Does This Mean for House Moves?

Despite the relatively positive picture of a housing market slowing down but not falling, let alone crashing, research carried out by Market Financial Solutions found that 20 per cent of homeowners are worried about mortgage rate increases and at least a quarter of renters state that the increase in interest rates will most likely prompt them not to go ahead with buying. But elsewhere, the picture is far from gloomy. The most recent Royal Institution of Chartered Surveyors survey has reported that 62 per cent of surveyors expect house prices to continue rising over the coming 12 months and, so far, the overwhelming evidence is on their side. Factors such as the widely-reported ‘race for space’ (the exodus from city to countryside that was sparked, at first, by lockdown) is still under way, and the New Mortgage Guarantee Scheme launched by the government in 2021, which allows buyers with small deposits to get on the property ladder, are helping the market to stay buoyant. Wales, in particular, has benefited from the push for more space, with its annual growth at 14.2 per cent – far in excess of the national average. And, as you’d expect when there’s a desire to escape built-up urban areas, London has become the country’s worst performer, with an annual rise of just 7 per cent – a harbinger, perhaps, of the single digit growth that’s expected to eventually become the norm throughout the country.