How do rising interest rates affect the property market in the UK?

November 27, 2021

The COVID-19 pandemic has held the world in its grip for close to 2 years now, and it has left its impact on all aspects of our society. The UK is not an exception, with many seeing their finances shrink while debts are going up. Government support around the world has ranged from sporadic, woefully insufficient, or nearly non-existent. Navigating these problematic times has proven to be a daunting task for millions of people trying to keep their expenses in check and hoping to have some funds left at the end of the month that can go towards a savings account.

One option to try and turn around the situation before it has become too unbearable is to seek advice from debt management professionals. The experts can create a personalized plan that takes into account your individual circumstances. Furthermore, they can alert you to debt relief opportunities you may have otherwise overlooked.

Booming Market Amidst the Pandemic

While some may be struggling to pay their bills, others are experiencing a significant shift in priorities. Indeed, the industry-wide implementation of remote and homework may have inadvertently changed the entire work landscape for the foreseeable future. The benefits for the workers are undeniable – eliminating the costly and time-consuming daily commutes, freeing up time to spend with their families and friends, building their personal skills, interests, and hobbies, or simply relaxing.

Having to spend plenty of time cooped inside due to the virus countermeasures, people have started to pay attention to their current living conditions and have decided this may be the right moment to invest in their own home. People in the UK have been looking for larger homes with sufficient living space while simultaneously moving away from major urban centers. The limited supply for properties meeting the criteria creates a natural environment for the prices to shoot up. Through several support measures, the UK government further helped the housing market remain buoyant during the lockdown months.

Record Highs

The surge in demand has boosted property prices to all-time highs. The UK’s property market is now the second most expensive housing market in Europe, only behind Monaco. Just in October 2021, the average home cost across the UK has increased by 0.7% compared to 0.2% in September and more than doubling some economists’ expectation of a 0.3% rise. On an annual basis, the increase comes just shy of 10%, pushing the average price over £250,311, the first time it has surpassed a quarter of a million pounds. On average, this represents a price jump of £30,728 compared to the pandemic’s start back in March 2020.

Demand for homes has so far defied the usual seasonal patterns, with the number of houses offers typically going down in the later months of the year. Instead, in October, the total number of offers was 22% higher than those in September while also marking a 26% increase in agreed sales.

Cooling Down

The future prospects for the UK housing market are extremely uncertain. Although the Bank of England decided against raising the current 0.1% base interest rate to accompany the release of the country’s autumn budget, it is largely speculated that it may opt to do so during its next announcement scheduled for December 16. BOE may find itself under pressure to increase the tax rate in order to combat the rising inflation, which is currently outpacing the predicted 2% by running above 3%. Further tax rate hikes are likely to happen in 2022, with the current projections being that it might reach 1% by the middle of next year.

With inflation already pushing prices up and putting pressure on the monthly budgets of UK residents, the tax hike must be implemented carefully. Its impact on borrowing may further diminish the available finances of millions of mortgage customers, which in turn will reduce their buying power and slow down the country’s post-COVID recovery. It is estimated that a benchmark rate of 1% will result in the typical variable-rate mortgage payment going up by £64 a month to approximately £660.

According to government data, a total of 7% of private sector tenants may already be in arrears for the period between April-May 2021. To support low-income earners and prevent them from slipping into further debt, the UK’s Department for Levelling Up, Housing, and Communities have announced a £65 million support package. Distributed by the councils in England, the funds should help prevent homelessness, support struggling families, and those facing the risk of eviction during the winter months. While welcoming the support package, the National Residential Landlords Association states that according to its data, the total amount of Covid-related rent debt has surpassed £300 million. The NRLA hopes that further measures will be implemented to lessen the impact on the country’s economic recovery from the pandemic.

About the Author Prabhakaran

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