The Impact of Rising Interest Rates on the UK Property Market

The Impact of Rising Interest Rates on the UK Property Market

The short-term outlook for the UK economy is somewhat negative, with a recession looming, stagflation on the horizon, and rising costs. Traders are betting that the UK interest rates are only going one way, and that’s up. How will this affect the property market? CMC Markets believes you should be quick if you’re selling, stop if you’re buying, and stay if you’ve borrowed.

The Office for National Statistics announced on August 17th that UK inflation rose to 10.1%, from 9.4% two months earlier, and The Bank of England is expecting it to continue rising, peaking at 13.3% in October. The accompanying higher interest rates, currently at 1.75%, and bleak two-year economic outlook generally mean bad news for homebuyers, landlords and renters across the UK.

Market analysts at CMC Markets expect interest rates to rise further to 2.25% in September. According to UK Finance estimates, this directly impacts mortgages on variable rates – around 1 in 5 households in the UK – and another 3.1 million whose fixed-rate periods expire in 2022-2023. Borrowers whose repayments are directly linked to the base rate, as set by the Bank of England, will now face mortgage repayments at rates between 3% and 4%, up from 1.75% and 2.75% only five months earlier. The impact of this will inevitably spill into rent prices.

CMC Markets analysed the latest data for June 2022 from HM Land Registry, published on August 17th. They concluded that the likely tendency for house prices is in a temporary slowdown, which is good news for those waiting a little longer to buy a home.

Michael Hewson, Chief Market Analyst at CMC Markets, said, “Houses sold in June 2022 only increased in price by 1% compared to May, whereas, last year, this constituted a much more generous 5.7% surge. This is only the first month this year for prices to slow down at such a fast rate, so some caution before jumping to conclusions is advised. Remember, house prices may be slowing down, but they are not decreasing. Since this is transactions data processed at the time, it does not consider the big leap in interest rates that the Bank of England announced later that month, let alone the even bigger hike in August.

“Therefore, despite the soaring inflation and rising consumer prices across the board, UK house prices appear to be trailing behind because demand for homes has generally come to a screeching halt. Most buyers are weathering the storm for a few more months at least, while some are also working out how the cost of living crisis will pan out in the medium term so that the new mortgage is not squeezing their pockets beyond their comfort zone.

“For those still keen to get on the property ladder, plenty of fixed-rate banking products can insulate them from the current spiralling interest rates on mortgages. They should, however, prepare for the possibility of being faced with higher-than-expected repayments once the fixed-rate period expires, as the new variable rates are at the lender’s discretion. Fixed rates are not a cure-all either, as they may now be set to a higher level to start with.

“The buy-to-let market is equally volatile. Landlords will either pass the increased mortgage repayments to tenants by increasing their rent or sell quickly to lock in a better price. Right now, though, those already on the property ladder are generally better off staying put rather than moving or re-mortgaging. They would not get a good deal on their old house in this market and may likely end up losing more money overall.”

A calculator on a desk with a pen and financial projections on paper

What did the Bank of England do earlier in August?
The Bank of England explained that the rise in interest rates was necessary due to external pressures which are expected to persist. This means that British firms and residents will continue to feel this weight reflected on rising domestic prices, wages outpaced by soaring inflation, and even higher mortgage repayments, despite the Bank’s attempt to widen the borrowing pool through less restrictive mortgage rules.

Although historic, the Bank’s decision didn’t surprise the trading analysts at CMC Markets, a London-headquartered financial services company, who believed the Bank was expected to raise interest rates higher than 1.25% during the June meeting as a means to keep import inflation in check. This is on the backdrop of a 10% year-to-date depreciation of the British pound sterling against the US dollar and an indication from the Federal Reserve, the US central bank, of a further interest rate increase of 0.5% or 0.75% in September.

What’s next, and when will things calm down?
Other than adjusting the interest rates to an accurate level to keep abreast of import inflation, the economic projections for the UK paint a bleak outlook for the next two years.

The UK is projected to enter a recession in the final quarter of this year, the Bank of England announced. The country’s economy will contract by 1.25% in 2023 and 0.25% in 2024; however, inflation is becoming a much bigger long-term threat, with unrealistic chances of falling back to the desired 2% much before 2024.

The current political race for the Conservative Party leadership and the consequent fiscal policies promoted by the new British government is a major factor to consider for any inflation, GDP, unemployment projections and investment decisions.

As it stands with the current measures, inflation is expected to peak at 13.3% in October – a sharper increase than the Bank anticipated in June, originally estimated at 11%. It will continue to rise throughout 2023, only to decline in 2024.

Meanwhile, forecasts for the Consumer Price Index (CPI) are less optimistic now, expected to decrease only to 9.5% in the third quarter of 2023, although the Bank anticipates a sharp fall in prices immediately thereafter.

A worried man sat on his sofa

Selling prices are set to increase to reflect rising costs, while real household post-tax income is expected to plunge in 2022 and 2023. The Bank predicted that core prices would peak at 6.5% this year, meaning that food and energy will constitute more than half of the headline CPI in the following six months.

The next meeting of the Monetary Policy Committee, where the Bank of England will decide the new base interest rates, is set for September 15th.

Read more property news and features here.

The Impact of Rising Interest Rates on the UK Property Market 2

Editorial Team

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