How housing market is changing after seeing increase in interest rates

How housing market is changing after seeing increase in interest rates

Following the Bank of England's five consecutive interest rate rises and additional increases anticipated in the upcoming months, mortgage payments are rising.

With inflation on track to approach 11% this year, the highest level in four decades, the Bank is attempting to keep it under control.

For many renters in some areas of the UK, owning a property has become an improbable dream due to the affordability of mortgage borrowing made possible by historically low-interest rates, which also inflated a housing bubble.

Compared to the prior year, the average UK house price climbed by 2.9 per cent in 2020. The rate increased to 9.3 per cent in 2021. Low-interest rates, a higher need for larger homes to suit remote work, and the UK government's stamp duty holiday, which was implemented in July 2020, are some factors that have helped drive up the price of real estate.

Despite the stamp duty exemption expiring on September 30, 2021, the home market's activity has remained healthy.

Why did the housing market surge in the price?

At the end of 2020, house price inflation began to pick up. After the nationwide lockdown ended in the first quarter of 2021, prices increased considerably, with several responsible variables.

Household savings increased to about £200 billion due to a lack of chances for discretionary spending during the times of lockdown. When the lockdown ended, people would have more money in their savings to invest in real estate.

Why Might Inflation Benefit Property Investors?

For the appropriate people, inflation in the housing market UK might be advantageous. If we as people are in debt, inflation may manifest itself in the most advantageous way possible. When investing in real estate, you borrow money to pay for the purchase. The volume of accepted transactions in April has put a strain on banks and solicitors' workloads, which has affected how long it takes to complete a sale.

Rising interest rates will impact some purchasers' ability to buy a home, but the impact might be minimal.

What is fueling the rise in UK home prices?

Prices have increased due to the ease of borrowing at low rates. Even while interest rates are rising, they are still relatively low by historical standards. An introductory rate of about 2% is still available for buyers with a sizable down payment for a two-year fixed agreement.

Another issue is the lack of housing supply. There aren't enough properties available in the locations where people desire them.

There is now a distinct difference between houses, which are in strong demand, and flats, which are proving more challenging to sell in many regions in the market.

The most recent housing price statistics are being released against rising UK interest rates, steepening inflation (which is currently at 9.1 per cent and is likely to rise), and a broader cost-of-living crisis stoking concerns about an impending recession. Many pointed to the UK's ongoing supply-demand mismatch as the cause of the country's rising home prices: The stock of available properties for sale remains exceptionally low, while demand is still strong, but activity levels have dropped to be in line with pre-Covid trends.

Extensive land holdings by significant developers that may not be used for construction for years are another issue that has drawn criticism. However, as values rise and few new homes are available, the developers benefit by holding onto the land in the interim.

The slowing of market growth is partly caused by rising mortgage rates. Mortgage rates have increased due to the Bank of England's decision to boost its base rate.

What will happen to UK housing market prices next?

Although there is disagreement among real estate housing market experts over the direction that house prices will go, few are calling for a significant decline this year. With interest rates rising and inflation further straining household budgets, the house price to income ratio is already at its highest. Therefore, the rate of house price growth is expected to drop by the end of this year.

Looking ahead, the UK housing market will continue to be supported in the short term by rising demand for more significant residential properties and a limited supply due to development constraints.

Mortage

The government-backed 95 per cent mortgage programme, which enables buyers to acquire a mortgage with a 5 per cent deposit, is one-way commercial banks have provided mortgages throughout the pandemic-induced crisis.

Therefore, the question is whether rising interest rates will result in a housing market UK crash, a steep decline in home prices, and a rise in defaults.

Toward the end of this year, when mortgage rates climb, the likelihood of higher nominal interest rates could start to moderate the rapid expansion in housing demand and prices. However, given that interest rates would be hiked gradually, a decline in house prices is unlikely to result from the Bank of England's policy rate rising from about 1% this year to 2.5% next year. Renters and those with variable rate mortgages are more likely to be impacted by the rising cost of living than those with fixed-term mortgages, with record high house price-to-disposable income ratios.

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