What do interest rate hikes mean for house prices

In the wake of the covid hit years of 2020 and 2021 and the resultant hike in the cost of living, the first quarter of 2022 has seen even higher levels of inflation in the UK with a CIPH (Consumer Prices Index with Housing) rate of 5.5% in February 2022. Experts anticipate more of the same as we continue through 2022, with a rise of over 8% predicted before the end of the year.

This most recent rise is the result of significant increases in worldwide gas and electricity prices, exacerbated by the ongoing Russian invasion of Ukraine and its impact on the supply chain, which has seen household utility bills increase substantially. Indeed, energy regulator Ofgem has now raised its price cap by a hefty 54% to £1,971 a year as of 1 April 2022, meaning the average utility bill has increased by £693. Ouch. Unfortunately, prices might rise even further in 6 months’ time when the energy cap is reviewed once again in October 2022. 

To try and temper this inflation and return it to the optimum level of 2%, the Bank of England has made a number of increases to interest rates since December 2021, with the rate currently sitting at 0.75% as of 17 March 2022. There is also the very distinct possibility of more increases to the base rate to follow, with predictions of a rise to 2%. 

But what do interest rate hikes mean for house prices in 2022 and beyond? 

Well, much like the disparity between supply and demand of goods and services which has seen inflation shoot up, the reduced supply of available housing compared to the increasing demand for new homes has kept house prices high at the beginning of 2022, despite the end of a number of government incentives in 2021. This includes – most significantly – the stamp duty land tax reduction, alongside the furlough scheme and the temporary 5% reduced rate of VAT for certain areas of the hospitality, travel and tourism industries. 

The stamp duty land tax reduction which was introduced temporarily from 8 July 2020 – 30 September 2021 to get the housing market moving again after the initial covid-19 lockdown saw average house prices shoot up to an annual increase of 13.6% in June 2021 (and even higher in regional areas such as Wales and the North West). However, after the stamp duty holiday ended completely on 31 September 2021, the number of property transactions began to drop from their covid-19 peak, returning to pre-pandemic rates. Price rises have also begun to slow, down from a 10.8% annual increase in December 2021 to 9.6% in January 2022 according to the Office for National Statistics (ONS).

Indeed, the overall rise for house prices in 2022 is expected to sit at around 3.5% growth, with a further 3% growth in 2023 based on the continued imbalance between supply and demand. However, at some point we will start to feel the impact of those higher interest rates on affordability. 

Whilst those who have plenty of savings in the bank will benefit from higher interest rates, anyone paying off high-value loans such as mortgages will see the cost of their borrowing increase significantly as interest rates rise. None more so than those homeowners who have taken out a tracker mortgage linked to the Bank of England’s base rate. As such the double whammy of a cost-of-living spike and increased mortgage repayments could very easily push homeowners into a situation where they are defaulting on their mortgage. And then there is the army of renters who have also seen their property fees increase alongside the cost of household bills and living expenses, pricing them out of the property market before they have even begun to consider the option of buying a home. Both of which are bound to have an impact on house prices, availability of housing stock and the number of property transactions going forward.

*This is a collaborative post.