Interest rates reach 13-year high
“Another 0.25% increase in interest rates will not have much of an impact on the strong housing market the UK is experiencing,” according to Nick Morrey (pictured), technical director at Coreco.
The Bank of England (BoE) recently raised interest rates to 1%, hitting the highest level in 13 years in an effort to curb inflation due to the rising costs of energy and other commodities in the global market. In an anticipated move, the bank’s Monetary Policy Committee (MPC) voted to increase the bank rate by 0.25 percentage points, from 0.75% to 1%.
Read more: Bank of England hikes rate to highest level in 13 years
The increase was the fourth consecutive since December, when the MPC decided to up rates from 0.1% to 0.25%. The rate was increased from 0.25% to 0.5% in February, and then hiked further from 0.5% to 0.75% in March.
Morrey, however, believes that the lack of stock available for purchase is causing prospective buyers to try and compete with a rising number of properties going to ‘sealed bids’, which indicates a withdrawal of a few purchasers would not have much of an effect.
“The reality is that a £250,000 mortgage over 30 years, using rates of 2.0% and 2.25%, would see monthly payments increase from £928 per month to £959 per month, and although if that were a five-year fixed rate that is an extra £1,860 each month, it is £31 per month or £7.15 per week, which is not enough for the majority of budgets to cope with,” he added.
Getting approval for mortgages, Morrey said, will become harder as a result of the cost-of-living, however he said that when it comes to the home we want to live in then small sums are not likely to make the difference between buying and not buying.
Morrey added that if this increase is part of a run of further increases, then he believes the squeeze on demand will eventually grow. However, he outlined that the Bank of England is not renowned for such rapid increases in interest rates, especially in a period of cost push rather than demand pull inflation.
“The biggest threat to the housing market is both overall consumer confidence and employment levels,” Morrey said. “Unfortunately for Rishi Sunak and Andrew Bailey both can be affected by events out of their control but for now both remain robust.”
Alex Maddox, capital markets and digital director at Kensington Mortgages, believes that markets are expecting a much steeper incline in the Bank of England base rate in the coming months.
Read more: Bank of England base rate – what happens next for property prices?
“Markets also expect that the bank rate will increase to 2% within the next 12 months. This is due to a number of factors but most particularly inflation,” Maddox said.
He added that inflation is expected to reach 8% in Q2 2022 and potentially even higher towards the end of the year when the next energy price cap could again be increased.
Looking to 2023, Maddox believes that inflation could decrease materially once energy prices stop rising – but he explained that the 2% target is not expected to be met for over two years.
“Market participants also expect the two-year swap rate to increase steadily over the next year with the three-year swap rate flattening in the near-term,” he said.
However, the two- and three-year swaps are anticipated to drop back down in two- and three-years’ time, according to Maddox.
“The five- and 10-year swap rates have slowly been increasing although are seen to be relatively flat over the next six months, however markets see these rates dropping slightly in the next one to two years,” he concluded.
