Author : Mary-Anne Bowring
The Monetary Policy Committee of the Bank of England raised interest rates by 0.5 percentage points to 2.25 percent to one percent on September 22, 2022. This is the highest interest rate since 2008. The high-interest rates are likely to have a huge impact on house prices, savings, and the economy
Why Has The Bank Of England Raised Interest Rates?
The rise in interest rates was inevitable as it was becoming increasingly tough for banks to control the spiraling inflation. A few members of the Monetary Policy Committee were asking for tougher measures with a 0.75-point increase. They expressed concern that inflation was becoming entrenched. However, with inflation driven by fuel prices and a war we are in unprecedented times, and rather than tax cuts fuel bill subsidies at source would, in my opinion, be the best way to curtail the chaos.
Interest rates are tools used by the Bank to give the economy a stimulus or to stop it from overheating. The Bank has been raising interest rates since December. Many economists thought inflation would be brief and fleeting. However, the ongoing high cost of energy indicates it will last longer. Bank expects inflation to peak at around 10 percent. Buyers looking to purchase a home in 2022 are looking at the current state of the UK housing market with some concerns. The latest interest rate increase is making some first-time buyers have second thoughts about getting a mortgage. They are willing to wait and see the long-term effects of the increased rate.
What Is The Impact Of Higher Interest Rates On The Housing Market?
Increasing interest rates is an old strategy to slow down inflation. However, it can create problems in some sectors. General interest rates are reflected in the mortgage rate offered by lenders. It makes mortgages expensive for borrowers. This often leads to reduced demand. Increases in mortgage rates are also likely to impact landlords. Higher mortgage repayments can affect their cash flow. As the total annual income remains constant, they will have to pay taxes at the same rate, which means they lose money. The circumstances may force the landlords to sell their property, or under pressure, landlords may well try to increase rents.
Is Inflation Good News For The Property Market?
The situation may seem discouraging. But there are still many opportunities to be explored. House price inflation is good news for anyone looking to sell their property. That is unless a demand is curbed and we are in a recession. An offshoot of this is that more properties will be available for sale in the market, creating wider choices and opportunities for buyers. But then human behavior – hesitancy – wait and see, fuels the spiral downward demand, put simply would be house buyers have to feel confident to spend.
What’s Driving UK House Price Increase?
The inflated price of UK homes can be due to the supply of cheap credit. Interest rates are rising, but they are still low by historical standards, such as the 1990s recession.
The planning system of the government has been blamed for slowing down the process of building new properties, and population growth, more single households, and council house sell-offs are all contributing to current supply shortages. The government’s proposals to introduce a zoning system can be expected to encourage developments in designated areas. However, the proposal is yet to take a concrete shape as there is opposition to the proposal from some quarters.
It is unlikely that major historical cities will ever become the zoned grid style for development that parts of Australia adopt because after all, London is an amalgamation of villages, each unique in character which over time have merged together due to population growth. Many big developers have also been criticized for their reluctance to develop their land or sell the same for development. Of course, developers need a land pipeline, but many have profited from rising values, slow planning permissions, and an uplift in value by holding onto land.
What’s Next for UK House Prices?
The property market is divided on the question of which direction the house prices will go in the next few years. Some experts believe the period of price growth has reached its maximum. The psychological impact of the rising base rate of interest, higher mortgage rates, the cash flow squeeze due to the higher cost of living, and the gradual improvement in supply will all contribute to the slowdown. Figures across the nation showed that the annual rate of house price growth has eased marginally.
The housing market will likely slow down as growing inflation rates result in higher interest rates. However, housing prices are not likely to reduce as demand far outweighs supply.
Mary-Anne Bowring FIRPM FRICS FARLA FCABE Founder/Head of Asset Management
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