Will an interest rate rise mean lower house prices?

14 December 2021

3 minute read

During a year dominated by lockdown restrictions, furlough schemes, and empty high streets, few could have predicted that in this environment, UK house prices would reach record levels.

And the phenomenon is not limited to these shores. This past year has seen house prices spike worldwide, showing that the demand for local and international property continues unabated and largely unaffected by the pandemic.

Many analysts at the beginning of the crisis had initially expected the resulting social and economic restrictions would put off buyers, resulting in a dip in demand. However, while the world went into lockdown, central banks continued to maintain low interest rates – and low interest rates have historically resulting in reduced-cost mortgages, which in turn can often drum up demand.

The continued availability of low-cost mortgages, alongside shifting spending patterns during the past year, was certainly a determining factor in maintaining demand for property. According to the Office of National Statistics (ONS) the UK average house prices soared by almost 12% over the year to September 2021.

In November 2021, the Bank of England surprised the markets and kept interest rates at an historically low 0.1%. With the UK inflation rate sitting above 4% and expected to rise to 5% in 2022, the likelihood of the Bank of England raising interest rates and ending this record low has increased.

Huw Pill, the Bank of England’s chief European economist, has strongly hinted that the Bank will take action sooner than later. Pill said: “Given where we stand in terms of data and analysis, I view the likely direction of travel for monetary policy from here as pretty clear.”

What will happen to house prices?

The impact of a rise in interest rates on housing prices will depend on the size and timing of the rise, as well as the supply of available property – with properties in short supply, the current high demand ensures prices remain elevated.

With so many variables at play, forecasts for property prices vary widely, with some expecting no change, while others predicting a surge in growth. Real estate agency Savills’ recent property report predicts that in five years, the typical UK property value will increase by 13.1%, while the Bank of England rate will rise to 1.5%.

Liam Boardman, Senior Wealth Management mortgage specialist, says that we should put any interest rate rise into historical context. “I often tell clients that even if we are soon to enter an era of regular interest rate rises, they should be aware that mortgage rates will likely remain very low compared to historical norms for some time. Many clients will reasonably follow with: ‘How long can this last?’ The answer is, of course, we don’t know.”

Whatever the Bank of England decides to do in December 2021, demand for property remains considerably higher than the available supply.

Additionally, the recent emergence of a new coronavirus variant and imposition of travel restrictions will mean the return of overseas buyers in significant numbers has been pushed back to later in 2022. Should overseas buyers eventually return in the same numbers as before the pandemic, the demand for properties will further increase – and with no expected increase in supply, prices will likely continue to be pushed upwards in the future.

Whether house prices have been driven up primarily due to the historically low cost of borrowing or the drastic shortage of available property remains to be seen. Boardman adds: “With so much news chatter and column inches devoted to interest rate rises, none of this has affected our clients’ appetite to move or buy their dream second property.”

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