Will rising interest rates slow growth in the UK property market?

As the Bank of England continues to raise interest rates in its battle with persistent inflation, what will this mean for the UK’s residential property market?
Published 27 October
4¾ mins

Soaring energy prices and crippling inflation are fuelling fears of a recession. As the Bank of England responds by raising interest rates, what impact will this have on the UK’s residential property market?

September 2022 saw the consumer prices index, the UK’s preferred measure of inflation, rise by 10.1% year on year, up from 9.9% in August and back at the 40-year high set in July. We are also yet to see the effects of the 80% rise in energy bills due in October and further large increases expected in January.

The Bank of England continues to respond with aggressive monetary tightening – hiking the base rate of interest from 1.75% to 2.25% in September – the highest level for 14 years. This marks the central bank’s seventh increase since December 2021 as it attempts to get a grip on spiralling inflation. Any increase in the Bank of England’s base rate quickly feeds through to increased loan and mortgage rates, so the cost of borrowing rises.

This situation was exacerbated by the new UK government’s unfunded mini-budget, which sent financial markets into turmoil at the end of September. A rapid rise in gilt yields prompted mayhem in mortgage markets as lenders rapidly withdrew products in response to the soaring cost of funding them. The Bank of England stepped in to stabilise gilt markets, but the political and economic aftershocks are still playing out and the volatility and uncertainty are not good for the housing market.

This situation was exacerbated by the new UK government’s unfunded mini-budget, which sent financial markets into turmoil at the end of September. A rapid rise in gilt yields prompted mayhem in mortgage markets as lenders rapidly withdrew products in response to the soaring cost of funding them. The Bank of England stepped in to stabilise gilt markets, but the political and economic aftershocks are still playing out and the volatility and uncertainty are not good for the housing market.

The more affluent house buyers have certainly not been deterred by rising interest rates. Property group, Savills recently released its five-year forecast for the UK’s prime housing markets, which reflected strong levels of activity, despite the backdrop of international and domestic uncertainty. The firm expects prime central London prices to rise by 4% across 2022 but has forecast better growth of 7% for 2023 as international buyers are expected to return, particularly if sterling continues its downward trend and makes UK property more appealing.

Although annual average house prices in the UK had continued to increase up to June 2022, according to the Office for National Statistics, there are signs they are slowing. The outlook for both interest rates and real incomes remains negative and the impact of the government’s unfunded budget plans will not help consumer confidence. The GfK consumer sentiment indicator, a snapshot of how UK consumers feel about the economic outlook over the next 12 months, was already at a record low of -44 in August.

While rising interest rates, falling consumer confidence and the cost of living are all serious risk indicators, why is their impact on the housing market still muted?

The fact is there are other aspects of the housing market that give grounds for more optimism.

Interest rates are still low

Interest rates while rising fast are still relatively low. Between 1971 and 2022, interest rates have averaged 7.15% – from an all-time high of 17% in November 1979, when Margaret Thatcher’s government was battling inflation, to a record low of 0.10% in March 2020, in response to the COVID-19 pandemic. 

Housing supply remains constrained

As we mentioned earlier, demand continues to exceed supply and unless the government has plans for a massive house building programme, this is unlikely to change anytime soon.

Cash buyers and fixed rate mortgages

About a third of homes are bought with cash, and around three quarters of borrowers are protected in the short term by a fixed-rate mortgage. With more than 90% of new borrowers choosing this option, a sizeable majority of borrowers will not feel the effects of the base rate rises until they need to renew their current deal.

More stringent borrowing criteria

As always, the lower end of the market will be most vulnerable to rising interest rates. Although mass repossessions are less likely since lenders introduced more stringent affordability tests in the wake of the global financial crisis, and the current labour market remains tight. Unemployment levels are at an almost 50-year low, at 3.8% for April to June.

The high end of the market remains buoyant

Not everyone is struggling to get by and as the Savills forecasts show, the market in prime locations is expected to remain buoyant, particularly for property above £5 million. This section of the market is less reliant on borrowing so less likely to be affected by further interest rate rises.

We are likely to see a fall in transactions in the wider market, though, as buyers hold back in the face of rapidly rising mortgage rates and escalating energy costs, which could serve to dampen overall demand.

Predicting the future of UK property prices is notoriously difficult because for nearly two decades governments have frequently intervened to boost prices when growth has stalled. However, with soaring energy prices, a cost-of-living crisis and its own political problems to contend with, will this government have the capacity to support homeowners as well?

Opinions vary on how the current economic disruption will play out in the UK property market but, as with any investment, it always pays to take a long-term view.

Clients can borrow against a UK, Isle of Man or Channel Island-based residence, be it a home or an investment property. We also lend against investment portfolios, and loans can be denominated in Sterling, Euros or US Dollars. With clients in 160 countries, we often help clients based outside the UK, and have lent using the same approach across market cycles since 1987.

 

To find out more about Nedbank Private Wealth’s bespoke lending services, please contact your private banker directly or call our client services team on +44 (0)1624 645000. Or you can get in touch using the links to the forms towards the end of this page.

If you fail to keep up loan repayments, your assets used to secure the loan may be at risk and/or your home may be repossessed. Any examples are for illustrative purposes only. The webinars and Q&A do not constitute an invitation or inducement to buy any financial product or service. None of the content constitutes advice or a personal recommendation. Individuals should seek professional advice, based on their jurisdiction and personal circumstances, before making any financial decision.

about the author

Chiraag Patel

Chiraag Patel

Chiraag joined the team in 2021 with responsibility for Nedbank Private Wealth’s lending proposition in the UK. His primary role is to support clients’ borrowing requirements, as well as help clients who have been introduced by mortgage brokers and other property intermediaries.

 

With 18 years’ experience as an adviser in the property teams of financial services firms, with an emphasis on serving the high net worth market, Chiraag’s previous roles include time as a credit specialist at Santander Private Banking and Barclays.

 

He holds a Certificate in Mortgage Advice and Practice (CeMAP) and graduated from the Queen Mary University of London with a BSc (Hons).

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