Let’s be honest, even with recent rises interest rates are not really all that high. Historically they are still very low. But they are certainly high compared to recent times. The majority of homebuyers in the market today will never have known mortgage rates to be so high.

So how do higher interest rates affect the property market and how might they affect it in future?

Houses will be more expensive to buy

Houses will be more expensive to buy, when looking at the monthly cost that is. The difference is very significant too. The monthly repayment on a typical £350,000 mortgage at 2.5% is around £1,570. The monthly repayment on a typical £350,000 mortgage at 5% is around £2,047. That’s an extra £5,724 a year to repay.

Looked at another way, a homebuyer who can afford to pay £1,570 a month and could have borrowed £350,000 can now only afford to borrow about £268,000.

This is likely to cool the market. People are less likely to move unless they really have to.

Offers will be lower, possibly much lower

The market will likely return to a situation (some would say a more normal situation) where buyers offer well under asking price, not the asking price or even above it.

Asking prices will need to be set with this in mind.

Property prices will be pushed down

Although property selling prices are proving fairly resilient at the moment – with annual prices still rising and only small monthly falls – it’s not hard to see that they may start showing marked annual falls sometime soon.

Again, asking prices will need to be set with this in mind – and seller expectations will need to be managed.

Buyers are likely to look for smaller, cheaper houses

Buyers who want or have to move are likely to look for smaller, cheaper properties that fit within their monthly mortgage budget. For example, a buyer who might have been in the market for a house might now be in the market for a flat.

The market for flats and terraced properties could hold up well and prices may not be affected so much. Larger, detached properties could prove difficult to sell and take much longer to do so.

Developers will build fewer new houses

This is not a prediction …. it is already happening. Developers are building fewer new houses.

In some ways, this could help support the market. Demand for homes will be lower but supply will be lower too.

There could be more distressed sales

Some homeowners may be forced to sell their homes. There could be more repossession sales.

This is debatable to a great extent however. While in the past it would have gone without saying lenders are likely to have to show more forbearance now.

Homeowners are more likely to move rather than improve

This has generally always happened in the past when the property market has become more difficult. Rather than looking at moving up to a swish new house people look at improving or extending their existing one instead.

For example, the average price of a three bed house (England) is currently around £280,000. The average price of a four bed house is around £425,000. The cost of extending a three bed house by one bedroom is a fraction of that difference – even before you take account of moving costs and so on.

Slow property markets can be very good for builders even if they are not so good for estate agents!

There will be fewer house sales

It’s sensible to conclude from all this that there will be fewer house sales. More people won’t be able to afford to buy a house. People who can are likely to be much more cautious.

It may not be quite so severe as some forecasters suggest, however. There will still be people who have to or need to buy a new house. And it’s worth bearing in mind that not all buyers buy with a mortgage. Around 25% of buyers overall are cash buyers, and these people aren’t affected by higher interest rates.

But …. higher interest rates tend to regenerate the market, eventually

This is something that those who say higher interest rates are a bad thing for the housing market often fail to realise. When higher interest rates cause house prices to fall property becomes more affordable again. This encourages buyers back into the market. House sales increase. Prices start to upswing. It is probably one of the main reasons why the property market is cyclical.

Often, it is investors and the all-important first time buyers who recognise that the market is becoming more affordable first and who drive the regeneration.

This regeneration of the property market generally happens even when interest rates remain high, or even when they keep increasing further. But when interest rates fall the regeneration is likely to be accelerated.

And this is precisely what some forecasters are forecasting at the moment. The forecast is that interest rates will start to fall in the next year. For example, the OECD forecasts UK interest rates at under 4% by the end of 2024.

Ultimately though, although it may seem counter-intuitive, higher interest rates can actually regenerate the property market.


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