Skip to content

Rising Interest Rate Might Cool the Rising UK House Prices

COVID-19 restrictions have been easing all over the world, with people everywhere breathing huge sighs of relief as the challenges of the last 23 months appear to be coming to an end.

However, there is no cause for celebration just yet. There are still challenges to contend with, such as shortages in goods and services, and reduced labour supply. Higher prices present a trend of global concern, causing national governments to respond to the situation in different ways. The UK seeks to combat the pandemic-induced inflation with a concomitant increase in interest rates. A rise in both inflation and interest rates will, naturally, impact the British economy.

The pandemic caused the inflation rate in the UK to hit a 10-year high of 4.2% in October, which has commentators certain that December will see the rise of interest rates as well. Apart from reaching its highest levels in a decade, the inflation rate is worrying because it is twice the rate the Bank of England aimed for in Q4.

Some significant contributors to the higher inflation rate are hikes in electricity, gas, and transportation prices. Transportation appears to be the ultimate culprit, but the problem did not originate within the logistics sector. Earlier in 2021, a shortage in microchips had severe knock-on effects for the rest of the supply value chain, wreaking havoc on the production of new cars. Consequently, second-hand cars were just over 20% more costly in Q3 than in Q2.

Before the pandemic, the Bank of England staunchly kept the interest rates hovering around 0.5%. But once March 2020 came around, the effects of the coronavirus were becoming ever more evident. So, the BoE set interest rates at a historically low rate of 0.1%. Drastic as this move was, it helped to keep the British economy afloat while the pandemic raged around it.

The Bank of England traditionally uses interest rate hikes to counteract inflation. The logic behind this strategy is that costlier borrowing for families and firms will decrease loans, and fewer loans mean decreased demand and lower prices. Instead of spending more money, families and firms will be inclined to save more which further minimizes the ill effects of inflation.

At the height of the pandemic, mortgage rates were astronomically low due to intense competition to retain market share. But ever since the onset of record-breaking inflation – coupled with higher interest rates – the real estate sector reacted by increasing mortgage rates. Professional corporations that specialize in lending, such as NatWest, Halifax, and HSBC, have raised their mortgage fixed-rate plans.

Those with a small amount of savings will feel the effects of rising mortgage rates the most. For example, first-time buyers who are on the younger end of the millennial age range, i.e., buyers aged 25 to 30. These buyers have endured a lot on account of erratic price behaviour in the housing market.

Results from the English Housing Survey show that homeowners have benefited from the pandemic because it has allowed them to save. However, people who rent their accommodation are in harsher situations as the cost of putting a deposit together has radically increased. To meet these new needs, renting families who want to move will have to dig into their stocks and shares ISA savings.

A structural factor that has a vital influence on house prices is the government-initiated stamp duty holiday, which ended in September. Its initial effect was to encourage prospective homeowners to buy homes quickly, as it would save them upwards of £150,000. As soon as October 1st came around, the number of housing-related transactions drastically fell off.

According to Hargreaves Lansdown personal financial analyst, Sarah Coles, the end of the stamp duty holiday brought a lot of property sales forward. In other words, property sales that would have taken place in December and January were fast-tracked to meet the stamp duty deadline. Property sales fell by 52% after the stamp duty deadline passed, which was quite a shock to the property market.

Prospects for the British economy are not certain, observes the Nationwide Building Society. Though the housing market appears to be cooling off in terms of pricing, families are still experiencing a great deal of budgetary strain due to inflation in other sectors of the economy.

Winter naturally means increased expenditure on energy, but with the rise of gas and electricity, these expenses could prove quite prohibitive for the average household. Any family who currently rents their home, and is considering changing their accommodation, would have to put that dream on hold. They would have to wait until the end of winter, or the prices of fuel and electricity decline, before making a move.