Will rising interest rates in the UK cause the property market to collapse?

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Interest rates are rising, with further increases expected in the coming months as the Bank of England tries to contain inflation – to exceed 10 percent this year.

This figure – the highest since 1982 – is rightly a cause for concern, but price inflation of 10 percent in the housing market has been allowed to persist for a long time. The latest official figures, released Wednesday, show property prices in the UK have increased 9.9 percent in the year through March, bringing the average selling price to £297,524.

Ultra-low interest rates have made mortgage lending cheaper, inflating a housing bubble in parts of the UK that has made home ownership a distant dream for many renters. So, will high interest rates help cool the country’s run-of-the-mill real estate market?

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

Official figures show that prices have increased in every region of England over the past year. Between February and March 2022, prices fell 0.9 percent in London and 0.8 percent in the east of England.

Figures released by Halifax on Friday for a period before the Bank of England hiked interest rates show little sign of a slowdown in April.

Despite fears of large increases in living costs and energy bills, house prices rose 1.1 percent (around £3,000) from March.

The average house price reached £286,079 after the 10th consecutive monthly increase in prices, marking the longest period of increase in six years.

Halifax said the “race for space” that began during the pandemic will continue as people move from city apartments to larger homes in more rural areas.

Price growth in April was slightly slower than the 1.4 percent recorded in March, but the annual increase was 10.8 percent, well above average wage increases.

Some analysts had expected price increases to calm down after the stamp duty holiday ended last year. This did not happen.

There are other signs that prices are not going to drop in the near future. The number of sales increased 28 percent in April compared to January.

Realtor Chestertons said he’s seen a 31 percent increase in the number of people signing up to register at their London branch.

CEO Guy Gittins said there is now a “strong seller’s market” and the number of sellers looking to lower their prices fell 38 percent last year.

“The sheer volume of agreed sales in April created a demanding workload for lawyers and banks, which impacted the time it took to finalize a sale,” he said.

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

What is driving home price increases in the UK?

Prices were inflated by the cheap supply of credit. While rates have increased, they still remain very low by historical standards. Buyers with a large deposit can continue to get a fixed two-year deal with an initial rate of around 2 percent.

Home supply also continues to be a problem. People don’t have as much property as they want in the areas they want.

There is now a clear distinction on the market between homes that are in high demand and apartments that are more difficult to sell in many areas.

Britain’s planning system has been accused of slowing the process of building new properties and restricting supply.

The government recently rejected proposals to radically overhaul the system and replace it with a zoning model that would allow much faster approval of developments in designated areas. Instead, a less ambitious plan was mentioned in the Queen’s Speech.

Large developers have also been criticized for hoarding large amounts of land that cannot be used for years to build. Meanwhile, as the supply of new homes is constrained and values ​​continue to rise, developers are making a profit by holding the land.

These factors will not be affected by rising interest rates.

Cost of living: how to get help

The cost of living crisis has touched every corner of England, bringing families to the brink of rising food and fuel prices.

  • Independent asked the experts to explain small ways you can stretch your money, including managing debt and getting items for free.
  • If you need access to a food bank, find your local municipality website and then use the local government’s site to find your nearest centre. The Trussell Trust, which operates several food banks, There is a similar tool.
  • Citizen Advice provides free assistance to people in need. The organization can help you find grants or benefits, or advise on rent, debt, and budget.
  • If you are experiencing feelings of distress and isolation or are having trouble coping with it, The Samaritans offers support; You can safely talk to someone on the phone toll free on 116 123 (UK and ROI), email [email protected] or visit the Samaritans website for details of your nearest branch.

What’s next for UK house prices?

Real estate market experts are split on where home prices will go next, but few are predicting a big drop this year.

Tom Bill, Knight Frank’s head of UK housing research, said the recent price increase peaked last month.

“We don’t expect prices to drop, but we’re probably in the last month or two of double-digit annual growth,” he said.

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

Halifax expects home price growth to slow further as affordability gets more strained.

“House prices to income ratios are at their highest ever, and the rate of home price growth is likely to slow by the end of this year as interest rates rise and inflation further squeezes household budgets,” he said. Russell Galley, managing director of Halifax.

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