Expert discusses the implications of the high interest rate environment
The Bank of England’s Monetary Policy Committee increased the base rate 14 consecutive times from 0.1% to 5.25%, before holding the bank rate at the last two meetings.
The resulting implications of this are filtering through to homeowners steadily as they come off their existing deals and find their affordability reduced, while first-time buyers are struggling in this regard from the outset.
So, how have interest rate hikes impacted the housing market? Chris Little (pictured), chief revenue officer at software developer finova, which develops solutions and services for financial institutions and intermediaries, shared his analysis with Mortgage Introducer.
Little believes the UK housing market typically remains resilient due to the ongoing imbalance between supply and demand, so it is unlikely that a house price crash is on the horizon.
“However, high rates have naturally made it challenging for people looking for a mortgage to get on the housing ladder,” he added.
Fewer buyers, Little commented, are able to secure a loan due to inflated rates and reduced risk appetite, but the knock-on effect is more likely to be a price correction, rather than a complete crash.
Little stated that the Office for Budget Responsibility expected house prices to fall 10% by 2024, and believed that between 40% and 50% of borrowers are still coming to the end of their fixed rate deals over the next six to 12 months, making them vulnerable to any market fluctuations.
“These borrowers will be remortgaging at a much higher rate than when they first took out a loan, and while this activity slowly drips through to the market, its full effect will probably take place around Q2 2024,” he said.
Little outlined that the government has already taken some steps to mitigate the impact of the recent volatility, such as the Mortgage Charter, which enabled lenders to offer customers the option to switch to an interest-only mortgage for six months at the end of their term.
“While this has helped keep repayments affordable, these measures could push the issue down the road by only offering temporary relief,” he commented.
Equally, Little said many borrowers are also concerned about interest-only deals in light of recent rate hikes, which may not make them a viable option for all.
The new normal, Little added, has seen 5% interest rates take over, and even if they do fall below this mark, he believes the days of ultra-low rates are unlikely to return anytime soon.
To adapt to this climate, he said borrowers will need to plan for an extended period and may have to consider fixing rates for a longer duration, beyond the conventional two- to three-year term.
The government, Little said, has a responsibility to support first-time buyers in the upcoming Autumn Statement, an opportunity which should not be squandered.
“The housing sector was left alone in the Spring Budget, which was understandable following the havoc caused by the Mini Budget, but it cannot be overlooked this year, especially with affordability stretched and the end of the Help to Buy scheme leaving a vacuum for first-time buyers,” he stated.
An extension of the mortgage guarantee scheme for another year, Little said, would be a welcome measure given that interest rates are expected to remain high throughout 2024.
It is also promising, he said, that the government is considering implementing a new ISA to boost savings for first-time buyers, given how effective the Help to Buy ISA and Lifetimes ISAs have been at boosting deposits.
Looking ahead, Little commented that the coming months are going to be an adjustment period for the housing market.
“As previously mentioned, I do not expect to see a crash as most homeowners have already seen the value of their homes appreciate over the last decade, and the structural mismatch between the supply and demand of housing is still a driving force behind the uptrend in house prices,” he said.
Instead, Little is expecting a shift in the real estate market, specifically foreseeing a correction in house prices.
“The recent drop in prices still is not the biggest plunge we have seen in recent times, the 2008 financial crisis being a relevant example, and in the long term, it will do little to dent the price growth we have witnessed over the last 50 years,” Little said.
He added that rates might stay higher for longer which could lengthen this correction, but with lenders already starting to price more competitively, this could give way to an uptick in demand next year.
How have you seen high interest rate hikes impact the housing market? Let us know in the comment section below.
