What do interest rates hike mean for UK property market?

  • June 24, 2022

What do interest rates hike mean for UK property market?

From the onset of the COVID-19 induced global pandemic and the first lockdown in the UK, there have been considerable hikes in house prices around the country. A majority of real estate experts denote this hike as a significant measure taken by the government to keep the sector appealing to potential investors. A few more notable factors are the panic buying of houses, income aid by the government in form of lower interest rates, and stamp duty holidays for a certain period of time.

However, a spike in interest rates has recently been observed in the UK property market, which can affect buying behaviour.

Interest rates are important…

Interest rates help regulate house prices, especially in the markets where the purchase is mostly based on mortgages. Therefore, these rates are important to the UK housing market because they can determine how much one will have to pay to avail of the mortgage facility. These rates also affect the value of properties for sale. Lower interest rates mean that credits become more affordable, which leads to an increase in the demand for properties. Similarly, higher demand drives up property prices.

On the contrary, higher interest rates increase the cost of credits that make mortgages less affordable for the buyer. Higher interest rates lower the demand for property.

According to Realtor.com says that there is an expected increase in house prices by a whooping 2.9 percent in 2022 while home sales are expected to rise by 6.6 percent. A 2.9 percent increase may appear small but is by all means crippling to an average British income earner.

It means fewer people will be able to afford to buy houses in the UK, especially on a mortgage. Due to the current hike in interest rates, people who do not have disposable income let alone a debt-to-income ratio to qualify for a mortgage loan. In this situation, what will be the UK house prices?

Latest house prices in London

The house prices in London rose 7.9 percent in the current year to April 2022, after which the average price of a home has reached £529,800 – according to the latest sold price data. It is notable that the lowest rate of growth was recorded in London among all the UK regions. The price rose 12.4 percent to £281,200.

The real estate experts denote the London property price growth to the demand for the most expensive and biggest properties for sale in London. The value of detached homes rose by 12.4 percent and reached £1,088,800 while the flats and apartments in the capital city rose by 6.1 percent to touch £443,200.

The rise in property values indicates that the new buyers and the ones with limited budgets find it hard to afford houses at rising rates and even harder to get mortgages as interest rates rise.

According to Geoff Garrett, director of the mortgage broker Henry Dannell, “Many prospective buyers are now finding that they simply aren’t eligible for the same level of mortgage financing that was available to them just a few short months ago, with many more struggling with affordability due to a squeeze on their disposable household income, coupled with increasing mortgage rates.”

Demand vs. Supply

Demand and supply are influenced by several factors including demographics, inflation, economic conditions, taxes, mortgage rates and availability of the credit. Money supply and interest rates have a reciprocated relationship, which means more money in the flow, and lower the interest rates. A large money supply lowers the interest rates – making it less expensive for the consumer to borrow. The higher the demand, the lower the housing prices. On the contrary, the more expensive credit is, the lower the amount of money you have and the demand for house ownership – resulting in higher pricing.