How Interest Rate Increase Could Affect UK Housing Market

how interest rate increase could affect UK housing market
It is expected that the Bank of England (BoE) will raise the base rate, also called interest rate, to 0.75%. This will be the third interest rate increase in three months and is a response to rising inflation.

With fears that inflation will rise above 7%, a volatile geopolitical situation, rising energy costs as well as a steep increase in cost of living have all contributed to the decision of the BoE to further raise interest rates. If the interest rate increase is taking place this week, as experts predict, then we will reach pre-pandemic levels, which we had in March 2020.

This rise was anticipated for a while, and so far it has not had a big impact on the housing market. In the first week of March, there were 47% more buyers than on average in the past five years. In the first two months of 2022 the number of buyers was 54% higher than the five-year average.

At the same time, the number of accepted offers is 81% up in the first week of March, which is 50% higher than over the first nine weeks of the year. So it seems that at the moment, the interest rate increase to 0.5% has not impacted much on the housing market.

The question is whether this will change if the interest rates are increased to 0.75%.

Sellers are also still confident, with the number of property valuations 11.3% higher in the first nine weeks of the year. Instructions are slightly behind, but they are still up by 6.3%.

How Does An Interest Rate Rise Impact On The Housing Market?

When it comes to interest rates rising, this means one thing for the housing market, higher mortgage rates. When mortgage rates rise, it gets more expensive to buy a property, which reduces demand and as a result the housing market slows down.

And it doesn’t just affect first-time buyers, who will need bigger deposits. Anyone who needs a mortgage or re-mortgage their house will find it more expensive. And this situation is further worsened by the rising costs of living and energy costs, which squeeze household budgets even more.

And the number of homes that have been bought with a mortgage has gone down. Only 28% or 6.8 million homes in England have a mortgage. This is 2% less than five years ago. So the number of homes being bought with mortgages goes down, yet the housing market is still very active.

So Why Is The Housing Market Still Strong?

It does seem that the housing market is immune to the effects of the recent interest rate rise. One reason for this is the end of the covid restrictions in England, so Tom Bill from Knight Frank thinks.

The first reason is easily overlooked – the end of the pandemic. The lifting of final restrictions and return to normality is spurring people to take decisions about how and where they live. Crucially, it means demand is more needs-driven and less susceptible to external events.

Tom Bill, Head of UK Residential Research at Frank Knight

Another reason why the further interest rate increase might not impact on the housing market is that some lenders will keep their rates down and drive competition. As a result, the rates overall could rise less than expected and keep the housing market active.

During several lockdowns, many people were able to considerably increase their savings. And the recent house price increase in the past two years, also means that sellers will get more for their homes. According to Savvas Savouri from Toscafund, these are reasons why the housing market seems unaffected by the rise in interest rates.

Households are sitting on £250bn of excess savings compared to the start of the pandemic. House price growth has also created an extra £1trn in housing equity over the last two years.

Savvas Savouri, Chief Economist at Toscafund

Will Further Interest Rate Increases Have An Impact?

It is widely expected that the BoE will have to further raise the interest rates in the months to come. Experts estimate that the base rate will reach 1.25% – 1.5% at the end of the year.

Combined with rising gas and oil prices and costs of living, caused by the Ukraine conflict, any further interest rate increase will further increase the pressure on household budgets.

This could ultimately convince people to stay put and not buy a property. When demand falls, the housing market will slow down. Industry insiders do not, however, expect, that house prices will stop increasing or even fall. But they predict that the house price growth will return to single figures.

So for the time being, the housing market seems insulated against any interest rate increase. Only time will tell if that will continue.


  • News Desk

    Our news desk team includes a qualified architect, a freelance journalist, and a fanatical property expert who has over 12 years experience in the industry.

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