Will UK house prices fall as interest rates rise?

Record high home prices in the UK, Germany, the US, New Zealand, Australia and Canada have one thing in common. It’s a historic low interest rate that pushed down mortgage costs and supported demand. However, interest rates are expected to rise by the end of next year in most countries, which could shake what has supported them. Fastest annual real home price growth In OECD countries for decades in the first quarter of 2021.

In the UK, the Bank of England unexpectedly maintained its current record low of 0.1% in November, market A rate hike at the Monetary Policy Committee in December is expected and could rise further next year.

Will home prices skyrocket as a result? According to experts, the answer depends on the size and timing of rate hikes, and whether real estate shortages and strong labor markets continue to put upward pressure. Forecasts range from slowing growth to a complete contraction.

The UK’s official home price index rose at an annual rate of 10.6% in August, at a record pace since 2007, despite concerns about a sharp revision after the July stamp duty cut. bottom. The October National Home Price Index shows that this trend continues even after returning to the pre-pandemic stamp duty rate.

Lucy Pendleton, a real estate expert at real estate agent James Pendleton, said this was a result of buyers rushing ahead of the “almost certain series of interest rate hikes” expected in the next 18 months. “Trade than stamp duty holidays.”

Borisgrass, senior economist at S & P Global Ratings, said, “Raising home prices while putting downward pressure on them will increase the cost of potential buyers and reduce demand.”

Many mortgage lenders are already in anticipation of hiking gain Mortgage rates for the past few weeks.

Jeremy Reef, a real estate agent in northern London, said rising interest rates would have a direct impact on a small proportion of borrowers in floating rate transactions, but rising interest rates would undermine confidence in the wider market. budget.

The UK’s financial oversight agency, Office for Budget Responsibility, forecasts last month’s budget that mortgage interest payments would increase by 20% in the two years to the third quarter of 2023, the fastest increase in more than a decade. I predict that it will be.

Line chart for Q2 2009 showing that OBR expects UK mortgage interest payments to surge = 100

Martijn van der Heijden, chief financial officer of mortgage broker Habito, said repayments could increase by hundreds of pounds a year, even if interest rates rise by only 0.25%.

More than 3.5 million first buyer mortgages have been issued since the Bank of England cut its policy rate to 0.5% in 2009 after a sharp cut from 5.75% in 2007. We don’t know what happened when interest payments rose significantly, “said Tomville, Knight Frank’s head of UK housing research.

However, after last year’s interest rate was cut to 0.1%, interest rates have a long way to go before reaching historical averages. This is the lowest level since the Bank of England was founded in 1694. Similarly, mortgage rates have remained at record lows. In September, the average “effective” interest rate (actual interest paid) on newly withdrawn mortgages was 1.78%, down from its 15-year peak of 6.2% in 2008. Over the same period, it fell from almost 6%. Up to 2% of unpaid mortgages, the lowest ever, according to the Bank of England. data..

Line chart of%, fixed effective interest rate showing that interest rates on new mortgages are at record lows
Mortgage rates in the UK are declining across products, and the graph shows mortgage rates for various products in August 2021 compared to August 2001. The mortgage rate in 2001 was about 6%. In 2021, it was in the range of 1.24 to 3.62%.

According to experts, banks can absorb some of the increase in funding costs with margins and reduce the increase in mortgage rates. Other factors may mitigate the softening of demand as a result of rising interest rates. The labor market is strong and companies often raise wages to attract and retain staff. According to Bank of England data, UK households have accumulated savings equivalent to nearly 9% of GDP since the first Covid-19 limit. “These savings are mostly concentrated in middle- and high-income households, and they are just the households that could buy them. [houses]”Glass says.

At the same time, according to the Royal Chartered Surveyor Association of the United Kingdom, few homes are for sale, and investigators report that branch-by-branch homes are near record lows in all regions of England and Wales. ..

Line graph of England and Wales. It shows the average for 12 months. The average housing stock per investigator is close to a record low.
The graph showing housing stock per investigator is declining in all regions, averaging for the 12 months to September.

However, other factors have shown to slow home price growth.

According to the country, real estate prices for first-time buyers’ income are now at historically high levels. According to national calculations, in London it can take 16 years for someone with an average wage to secure a 20 percent deposit for a typical first-time property.

“We expect rising interest rates to slow down house price increases, especially in areas where such affordable prices are already very high. London“Lawrence Bowles, senior research analyst at Savills, said.

Line charts in England and Wales,% show that the share of first-time buyers' income spent on mortgages has skyrocketed
Mortgage affordability is worse than its long-term average in most regions. A graph (%) showing the share of income of the first purchaser for mortgage repayment.London is overwhelmingly expensive, with almost 55% of its income being spent on mortgage payments

Overall, this means a variety of forecasts. Nitesh Patel, a strategic economist at the Yorkshire Building Society, said YBS expects home prices to continue to rise “at a slightly slower pace next year.”

Glass said the rise in UK home prices has already experienced a soft landing, “if the rise is too early or too large, it could hurt and worsen the housing market during the adjustment phase.” thinking about.

“The rise in mortgage rates seems to have set so sharply that it means that home prices will stagnate in the first half of 2022,” Toom said.

If bank rates rise to 0.75%, home price increases could fall to 4% by the end of 2023, according to Andrew Wischart, real estate economist at Capital Economics. But “if MPC implements a significant tightening cycle and perhaps raises bank rates to 1.5%, home prices could fall by 4%.”

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