On January 27th, 2023, the Bank of England raised interest rates by 0.25%, from 0.75% to 1%, the first increase in more than three years. The decision was made in response to rising inflation and concerns about the UK’s economic recovery. However, the increase is likely to have a significant impact on the UK housing market, with Peter Ball & Co estate agents in Cheltenham predicting a 20% drop in home values.
What is the impact of the interest rate hike on the housing market?
The interest rate hike is expected to cause mortgage rates to rise, making it more expensive for people to borrow money to buy a home. With mortgage rates set to rise, it may become more difficult for some buyers to afford their mortgage payments, and as a result, many may be forced to sell their homes or may default on their loans. Higher mortgage rates mean that buyers will have less money to spend on a property, which could lead to a drop in demand. With fewer buyers in the market, sellers may have to lower their asking prices, leading to a decrease in home values.
The Royal Institution of Chartered Surveyors (RICS) had already reported a decrease in buyer inquiries in the weeks leading up to the interest rate hike. They also noted a slowdown in price growth in December 2022, suggesting that the market was already starting to cool before the rate increase.
Why could the impact be greater than in previous interest rate hikes?
This interest rate hike is different from previous ones due to several factors. Firstly, the rate increase was unexpected, with many experts predicting that the Bank of England would wait until later in the year to make a move. This has caught many in the housing market off guard, leaving them with little time to prepare for the changes.
Secondly, the housing market is already facing challenges due to the pandemic and Brexit. The pandemic has led to a shift in work patterns, with more people working from home. As a result, many buyers are looking for properties outside of city centres, which has driven up demand for rural and suburban areas. However, this has also led to a shortage of homes in these areas, which could make it difficult for sellers to find buyers willing to pay their asking price.
Brexit has also had an impact on the housing market, with many experts predicting a slowdown in the market due to uncertainty around the UK’s relationship with the EU. The interest rate hike has only added to these concerns, with some experts warning that it could cause a significant drop in home values.
What does this mean for buyers and sellers?
For buyers, the interest rate hike means that it will be more expensive to borrow money to buy a home. Buyers may have to lower their expectations and look for properties that are more affordable or consider renting instead of buying. However, with a decrease in demand, there may be opportunities for buyers to negotiate a lower asking price.
For sellers, the interest rate hike means that they may have to lower their asking prices to attract buyers. They may also have to be more patient and wait longer for a buyer to come along. However, sellers who are willing to lower their prices may be able to sell their property more quickly.
What can the government do to mitigate the impact?
The government can take several steps to help mitigate the impact of the interest rate hike on the housing market. They could provide financial support to first-time buyers or increase the supply of affordable housing. The government could also implement policies to encourage more people to sell their homes, such as reducing stamp duty or making it easier to downsize.
However, it is important to note that the impact of the interest rate hike will not be felt equally across the UK. Regions with higher levels of property ownership and those with high levels of personal debt may be more vulnerable to the effects of the rate hike.
It is also important to remember that the UK housing market has proven to be quite resilient in the face of economic challenges. Despite the uncertainty caused by Brexit and the COVID-19 pandemic, the market has remained relatively stable, and many experts believe it will continue to do so.
Nonetheless, potential homebuyers and sellers should carefully consider the impact of the interest rate hike on their financial situation and the value of their property. Seeking the advice of a qualified financial professional or real estate agent can be helpful in making informed decisions.
