Interest rate rise: Property market braced for sales drop

The property market has been warned to expect fewer sales and more expensive mortgages after interest rates were raised for the tenth consecutive month yesterday.

The Bank of England’s monetary policy committee hiked rates by 0.5 percentages points to 4% despite two members voting to hold rates at 3.5%.

In more positive signs, the Bank said headline inflation is edging back and is likely to “fall sharply,” which some analysts see as a sign that there may not be too many more drastic interest rate increases to come.

For now though, borrowers face paying higher mortgage rates than this time last year, potentially hitting homebuyer demand.

Frances McDonald, research analyst at Savills, said: “For someone borrowing a 75% mortgage, the average quoted 2-year fixed rate more than tripled during 2022, from 1.57% in December 2021 to 5.43% in December 2022.

“Although this is down from a high of 6% in October 2022. 

“Changes to mortgage affordability criteria in August 2022 will also go some way in allowing new entrants to the mortgage market to access more borrowing and protects those coming off of a fixed rate mortgage deal.

“Successive rate rises are undoubtedly having an impact on housing market activity and price growth.”

Even at sub-4%, Marcus Dixon, director of UK residential research at JLL said, mortgage rates are considerably higher than in recent years. 

Dixon said: “This will, we expect, mean fewer moves in 2023, with transactions levels forecasts to fall by 30% on 2022 levels this year. 

“But within the Bank’s statement there was some encouraging news on the outlook for inflation, with expectations that annual inflation would fall to 3.9% in a year’s time, lower than previously forecast.”

Tom Bill, head of UK residential research at Knight Frank, added: “The resilience of prices and sales volumes will be put to the test in the spring when larger numbers of transactions take place and by which time virtually no five-year fixed-rate mortgages below 4% will remain in the system. We expect prices to decline by 10% over the next two years as budgets get recalculated.
 
“A strong labour market, relatively low supply, and the fact more homes have been owned outright than with a mortgage in England since 2013 will keep upwards pressure on prices.”

Jason Tebb, chief executive of OnTheMarket, said the higher interest rate environment makes appropriate property pricing more important.

He said: “This is where an experienced local agent is a huge asset, ensuring property is marketed at a realistic and achievable level and steered through to successful completion, even if it takes a little longer in more challenging market conditions.”