UK House Prices: Will Rising Interest Rates Cause a Housing Market Crash?

Mortgage payments are on the rise after five successive rate hikes by the Bank of England and further hikes are expected in the coming months.

The Bank is trying to contain inflation, which is on track to hit 11 percent this year, the highest in four decades.

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

But, as the era of low rates comes to an end, will the runaway UK property market start to cool down and may we even be headed for a crash?

What is the latest data on house prices in the UK?

Official figures this week show prices rose 12.4 percent over the year to April. That was a huge jump on the 9.7 per cent rise recorded in March, and means the median sales price rose by a staggering £31,000, more than the UK median wage, to £281.00.

For now, buyers appear willing to put up with the relatively modest increase in monthly mortgage payments, though official data is yet to reflect the most recent interest rate hikes.

All four nations saw big gains in the cost of a home with median prices rising in England to £299,000 (11.9 per cent), in Wales to £212,000 (16.2 per cent), in Scotland to £188,000 (16.2 per cent) and in Northern Ireland to 165,000 pounds sterling (10.4 per cent).

Growth was slower in London at 7.9 percent, though the capital still has the most expensive real estate in the UK.

More up-to-date figures from Halifax show prices were still rising rapidly in May.

Despite fears over living costs and large increases in energy bills, house prices rose 1 per cent (around £3,000) compared to April and 10.5 per cent over the year. .

The median house price reached £289,099 after the twelfth consecutive monthly increase.

Halifax said a continuing “supply-demand imbalance” for properties remains the main reason driving prices to new record highs.

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

“However, the real estate market has started to show signs of cooling,” said Russell Galley, managing director of Halifax Mortgages.

“Activity has started to decline and, coupled with the inflationary pressures currently being exerted on household budgets, activity is likely to start to decline.”

Many rural areas have seen big price increases as more people have embraced flexible working.

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However, there are signs that prices may still be supported by strong demand. Estate agent Chestertons said he has seen a 31 per cent rise in the number of people registering for viewings at its London branches.

Chief Executive Guy Gittins said there is now a “strong seller’s market” and the number of sellers willing to cut their selling prices has fallen 38 percent in the last year.

“The large volume of sales agreed in April has created a challenging workload for lawyers and banks that has impacted the time it takes to finalize a sale,” he said.

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

How much have mortgage rates risen?

Some lenders have raised their mortgage rates to twice the Bank of England base rate.

HSBC raised prices for fixed-rate mortgages by 0.45 to 0.5 percentage point last week, well above the quarter percent increase in the base rate. Nationwide also raised its rates by as much as 0.4 percentage point.

The Bank of England’s latest move will have an immediate impact on the 1.9 million standard or tracker variable rate mortgage borrowers, who move in line with the base rate.

On a 25-year £200,000 mortgage, that means £700 more in interest payments over two years.

About 75 percent of Britain’s 9 million mortgage borrowers have fixed arrangements, according to banking trade body UK Finance.

Fixed rates are also on the rise, with the two-year average fixed rate rising nearly 1% since December 2021.

The average two-year fixed rate is now 3.25 percent, down from 2.34 percent in December, according to figures from Moneyfacts.

Five-year deals rose to 3.37 percent from 2.64 percent six months ago.

With the rate gap between the average two-year and five-year fixed rate narrowing, locking in longer may be a sensible move, said Rachel Springall, finance and Moneyfacts expert.

Even longer terms are available at similar rates, with the average 10-year fixed contract now at 3.36 percent.

What is driving the rise in UK house prices?

Prices have been inflated by the supply of cheap credit. While rates are rising, they are still very low by historical standards.

Housing supply also continues to be a problem. There are not enough properties that people want in the areas that they want them.

There is now a clear dividing line in the market between houses, which are in high demand, and flats, which are proving harder to sell in many areas.

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

Government proposals to radically overhaul the system and replace it with a zoning model that would automatically approve developments in designated areas have proven controversial. Some reports suggest that the ministers will undo the changes.

Large developers are also being criticized for hoarding large amounts of land that cannot be used to build on for years. Meanwhile, developers are profiting from land holdings as values ​​continue to rise while the supply of new homes is restricted.

There were around 5% fewer home sales in May this year than in the same month in 2021, according to figures from HM Revenue and Customs (Anthony Devlin/PA)

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What’s next for UK house prices?

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

The question is how fast prices will continue to rise.

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

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

“The psychological impact of a rising base rate above 1 percent, higher mortgage rates, a cost-of-living contraction, and the gradual rebuilding of supply will all contribute to the slowdown as home prices return to land later this year.

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

“The relationship between house prices and income is already at its highest level in history, and with interest rates rising and inflation putting further pressure on household budgets, the rate of house price growth will slow by the end of this year,” he said. Russell Galley, managing director of Halifax.

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

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