Will rising interest rates cause UK house prices to fall?

Interest rates are on the rise with further increases expected over the coming months as the Bank of England seeks to contain inflation – which is on course to pass 10 per cent this year.

That figure – the highest since 1982 – is rightly a cause for concern, but in the housing market, 10 per cent price inflation has been allowed to persist for long periods.

Ultra-low interest rates have made mortgage borrowing cheaper, inflating a housing bubble that has made homeownership a distant dream for many renters in some parts of the UK.

So, will higher interest rates help to cool down the country’s out-of-control property market?

What is the latest data on UK house prices?

Figures released by Halifax on Friday, relating to a period before the Bank of England raised rates, show that there was not much sign of a slowdown in April.

Despite fears about living costs and big increases to energy bills, house prices rose 1.1 per cent (about £3,000) compared to March.

The average house price hit £286,079 after the 10th consecutive monthly rise in prices, marking the longest run of increases in six years.

Halifax said a “race for space”, which began during the pandemic, is likely to continue as people move out of apartments in cities to larger houses in more rural areas.

April’s price increase was slightly slower than the 1.4 per cent recorded in March, but the annual increase was still 10.8 per cent which is far in excess of average pay rises.

Some analysts had expected price rises to calm down after the end of a stamp duty holiday last year. That has not happened.

There are further signs that prices may not be coming down in the near future. The number of sales jumped 28 per cent in April compared with January.

Estate agent Chestertons said it has seen a 31 per cent jump in the number of people registering for viewings at its London branches.

Chief executive Guy Gittins said there is now a “strong sellers’ market” and the number of vendors willing to reduce their asking prices has fallen 38 per cent in the past year.

“The sheer volume of agreed sales in April has created a challenging workload for solicitors and banks which has impacted on the time it takes to finalise a sale,” he said.

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

What’s driving UK house price increases?

Prices have been inflated by the supply of cheap credit. While rates are increasing they still remain very low by historic standards. Buyers with a large deposit can still get a two-year fixed deal at an initial rate of around 2 per cent.

Supply of homes also remains a problem. There aren’t 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 tougher to sell in many areas.

The UK’s 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 proved controversial. Some reports suggest that ministers are going to ditch the changes.

Big developers are also being criticised for hoarding large amounts of land that may not be used to build on for years. In the meantime, the developers profit from holding the land as values continue to rise while the supply of new homes is constrained.

These factors will not be affected by rising interest rates.

What next for UK house prices?

Property market experts are divided on where house prices will go next but few are predicting a fall this year.

The question is how rapidly 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 reached its summit last month.

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

“The psychological impact of a rising base rate above 1 per cent, higher mortgage rates, a cost-of-living squeeze and the gradual rebuilding of supply will all contribute to the slowdown as house prices come back down to earth later this year.”

Halifax expects house price growth to slow further as affordability becomes more stretched.

“The house price to income ratio is already at its highest ever level, and with interest rates on the rise and inflation further squeezing household budgets, it remains likely that the rate of house price growth will slow by the end of this year,” said Russell Galley, managing director of Halifax.

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


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