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Rising interest rates increase price sensitivity in UK housing market

In June we saw yet another base rate rise, as the Bank of England struggles to tame stubbornly high inflation. This month’s update addresses the headlines, and what you need to know if you’re considering moving, or are in the middle of one.

Wage growth, inflation and interest rates

After reported annual wage growth of 6.5% in the year to April, underlying inflation remained unchanged at 8.7% in May, according to the ONS, with closely monitored ‘core inflation’ increasing.

Bank base rate increased by 0.5 percentage points to 5.0% in June and lenders immediately responded by raising their rates. As I write, the cost of a 75% loan-to-value, 5-year fixed rate mortgage with the Nationwide currently stands at 5.44% with an upfront fee of £999, up from 4.19% in mid-May.

Prime movements – relative resilience of equity rich markets

Our own prime house price index, which monitors the top end of the market, points to only a marginal price change in values across a relatively resilient prime London market in the second quarter (-0.2%). In what remains a relatively stock constrained market, values are currently down only -1.0%  year on year across the UK capital.

Beyond London, the capital values of prime property across our regional markets – broadly the top 5% to 10% by value – fell by an average of -1.5% in Q2 to leave prices down by -3.5% over the past 12-months, though activity remained relatively robust. 

As ever, the story is not quite as simple as these headlines numbers suggest. You can learn more about how different sub-markets have performed in our two recent press releases by clicking on the following links.

Prime London

Prime Regional

Mainstream house prices – a story of greater mortgage dependency

It takes a little time for affordability pressures to filter into the major mainstream house price indices. And so with a lack of any real movement in their house price index in May and June, at the end of last week the Nationwide reported that prices had fallen by -3.5% in the year to June and by -1.5% in the first six months of the year.

June snapshot

Data from TwentyCi also gives us another useful snapshot of the reaction of the market to recent events. Encouragingly for the prime markets, agreed sales were just 5% below the same month last year, with no noticeable increase in fall throughs.

Meanwhile, across the housing market as a whole (the ‘mainstream’ market), agreed sales fell to -9% below the pre-pandemic norm in June, while fall through rates rose to +8% above the same benchmark. 

The result of the increased cost of debt is likely to be a reduction in buying power for mortgaged buyers. It means our November market forecasts, which were looking pessimistic a month or so ago, could be right.

Remortgaging options

Finally, much of the focus of the press has been on those coming to the end of a fixed-rate mortgage who face a sharp increase in mortgage costs. For them, there is the option of an interest only period or extending their mortgage term, following an agreement between the government and the major mortgage lenders..

If you are approaching a remortgage, advice from industry bodies is that you should look across the whole market to secure the best deal that is most appropriate to your individual circumstances. If you would like to discuss your mortgage options, SPF Private Clients would be happy to provide you with tailored advice.

And from the lettings market…

Rents in the prime markets continued to rise in the second quarter of the year, as a lack of available rental stock continued to outweigh pressures on tenants’ household finances.  

Strong rental growth continues 

While annual levels of rental growth for prime properties across the capital moderated to +6.7% in the year to the end of June, rents rose by a further 1.4% in the second quarter of this year. That means, on average, rental values of prime homes in the capital have risen by 16% since March 2020. 

Meanwhile, outside of London, rental growth picked up again in the second quarter of this year, as rental values rose by 2.5%. That brings annual rental growth to 5.3%, and almost 22% above where they were in March 2020. 

Given the Renters Reform Bill (which will see the end of the Assured Shorthold Tenancy) is awaiting its second reading in the House of Commons, landlords would be well advised to benchmark their current rents against these market movements. 

Pressure on mortgaged landlords 

With buy-to-let finance costs rising in line with the rest of the mortgage market, this will be particularly important for those landlords carrying mortgage debt, who will face a further squeeze on their finances. I wrote a piece on this for the Financial Times last month – read more here.

The Bank of England will be looking closely at inflation over coming months to determine how much further it needs to go. This will determine whether we’ll see further increases in fixed rate mortgage costs, which have crept back up to the levels seen last autumn.

Inflation backdrop 

At present, the ONS is reporting that underlying inflation remained unchanged at 8.7% in May, while closely monitored “core inflation” increased to 7.1%.  

Meanwhile, wage growth reached 6.5% in the year to April. Though this has supported a good deal of the rental growth we have seen over the past three years, it has become both a blessing and a curse for landlords, as it now sits at the heart of inflationary pressures in the wider economy that the Bank of England is attempting to tackle though rate rises.

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