Property prices are rising and now mortgage rates too while the Bank of England is trying to keep inflation under control. Shortage in supply coupled with high demand for property will keep prices high and first time buyers might be forced to put down larger deposits or take on more expensive debt – which is an issue if inflation creates less appetite for first time buyers to take on debt. It is too early to say if first-time buyers will be the ones to suffer the most – indeed, the Bank of England predicts inflation, therefore the cost of living, to settle back down in the second half of the year.
Mortgage rates have started going up since late 2021 but remain low by historic standards. Mortgage rates are directly correlated to interest rates set by the bank of England, which either encourage or discourage spending and control inflation. In perspective, after the 2008 financial crisis, the Bank of England cut interest rates to 0.5%, in 2016 it cut interest rates after the 2016 Brexit referendum (fearing uncertainty over consumers’ spending) and in 2020 it cure interest rates to its lowest ever to 0.1% as a reaction to the economic slowdown brought on by the pandemic.
So while property prices are rising, this is not likely to be caused by a small increase in interest rates, rather it is attributed to the supply and demand issues that we are facing.
At the same time the Bank of England is expected to relax mortgage borrowing rules in the upcoming months. Buyers might soon be able to borrow more as the bank announced the possibility of withdrawing its mortgage affordability test, one of the two tests that are currently in place to ensure borrowers can keep up with mortgage repayments in the face of interest rate hikes. The Financial Policy Committee (FPC) has been subjecting borrowers to two tests when taking out mortgages since 2014. The tests, namely the loan to income (LTI0 flow limit and the affordability test, which are meant to guard against a loosening in mortgage underwriting standards.
This could mean that people are able to borrow more in property market with record-high prices, making them vulnerable to over-stretching their finances. Furthermore, buying real estate in a bull market while being hyper-leveraged might mean that re-selling the asset in a few years could be unfavourable.
In the short term we can expect the property market to continue its upward trend, but high inflation will eventually force interest rates up which, coupled with squeezed household finances, will slow the housing market down by the end of the year and into 2023.
House prices were already looking as if they would stagnate later this year, possibly deflating a little next year, now it looks inevitable as interest rates rise and affordability is squeezed by Putin’s war. Karen Noye, mortgage expert at Quilter added: “How house prices truly react to the Russian invasion won’t be seen for a few months, but it seems unlikely that prices are robust enough to cope with the unfolding crisis, especially against the backdrop of an economy trying to recover after the pandemic.
