The UK will avoid a housing market crash in spite of the Bank of England raising the base rate to 5.25% on Thursday, the majority of a panel of experts have suggested.
The panel – put together by finder.com – included academics, economists, and mortgage experts. Six of the 10 felt a crash would be avoided, while the other four felt that heightened interest rates “could contribute” to the market toppling.
“A crash will be avoided because of the drop in construction activity starting to limit supply of homes for sale, cash-rich property investors buying on weakness, and the recent rise in average rents restoring the appeal of buying-to-let,” said Alan Shipman, senior lecturer in economics at The Open University.
Charles Read, fellow in economics at the University of Cambridge, offered a contrasting view:
“We could see house prices fall by 5% or 10%, but the price of everything else rise 20% or more, resulting in a real-terms crash of 20%-30%.”
David McMillan, professor in finance at the University of Stirling agreed that the threat of a crash has currently receded. However, he noted:
“This interest rate shock could lead to an increase in selling, putting downward pressure on prices. The potential dangers remain an escalation of the Ukraine-Russia war and growth in the (sluggish) Chinese economy could put renewed pressure on international commodity markets.”
Mark Tosetti, Group Partnerships Director of ONP Group commented:
“As widely anticipated, we have a fourteenth interest rate rise, but have thankfully avoided a repetition of the half-point increase witnessed in June.
Mr Sunak’s aspiration to halve inflation this year looks grim despite June’s encouraging drop. It does raise the question, what is the optimal inflation level required for economic stability, before the MPC can consider cutting interest rates?
There is a prevailing belief that interest rates may peak a little higher but confidence is growing that there will be a decrease further into the year. Only then will we see the much-needed certainty in the cost of borrowing and the return of stability for swap rates. This would then lead to an increased availability of products that better meet the needs of consumers.”
Matt Smith, Rightmove’s mortgage expert, said lenders had anticipated the rise, largely having already factored it into mortgage rates “meaning we expect mortgage rates to continue their slow downward trajectory over the next few weeks”. He continued:
“June’s more positive inflation numbers have given the market renewed confidence that inflation will continue to fall, and the base rate won’t have to go as high as previously feared, meaning lenders can tentatively start to reduce rates.
All eyes are now on July’s inflation figures in a couple of weeks – more positive news could accelerate rate drops, while any surprises would temper the current renewed market optimism.”
Richard Donnell, Executive Director of Research at Zoopla, offered a similar appraisal:
“Although the base rate has increased further today, it’s not all doom and gloom for the housing market. There are signs that mortgage rates are peaking and 87% of mortgages are on fixed rates. For homeowners and would-be buyers who are impacted by mortgage rates, it’s important to note that the impact is not uniform across the UK.
Higher mortgage rates hit harder in higher value markets in Southern England where a larger deposit and income are required to buy with a mortgage. In contrast, in the north of England and Scotland, house prices are still rising as the impact of higher mortgage rates is less pronounced. In certain areas in these regions, it’s also still cheaper to buy than rent at 5.5% mortgage rates.”
