Will the Interest Rate Rise Affect House Prices?

Stamp duty reductions

As part of his mini budget, the day after interest rates were raised the chancellor announced changes in stamp duty that provided some better news for buyers looking for houses for sale in Chelmsford and other in demand areas: this tax on property purchases now starts on properties valued at £250,000 from the previous £125,000.

For first-time buyers the news was even better: the threshold has been raised from £300,000 to £425,000 so removing around 200,000 buyers from paying this tax completely.

So where does this ‘giving with one hand while taking with the other’ leave the property buyer and the price of the home they hope to buy?

In a nutshell no-one can be totally certain although severe value drops are unlikely such as in 2008 when prices fell by around 16% in the wake of the credit crunch, or the price crash of the early 1990s when interest rates well into double figures caused a 20% drop in values.

Varying expert predictions

Financial and economics analysts’ predictions vary from falls of 4-5% over the next year from the Centre for Economics and Business Research to 10% from the London School of Economics (LSE).

The LSE’s rationale for their pessimistic forecast is their view that the ‘affordability gap’ between what buyers can afford and the value of the property must narrow so they’re not spending too much of a proportion of their income on housing. Continuing rises in interest rates would severely widen this gap, so prices would have to fall to compensate.

However, as the population grows, there is a serious lack of land, and house construction projects aren't keeping up with the demand, falling well short of the 300,000 new homes needed annually.

The rental market also has a part to play in prices: with increasing numbers of buy-to-let investors pulling out of the rental market due to concerns over mortgage affordability and the government’s policies making it less attractive for landlords, the reductions in rental properties are forcing more people into buying so adding to the pool of potential property purchasers.

A matter of confidence

The future state of buyer and seller confidence might have a significant impact. Property values are significantly influenced by confidence; it is possible that purchasers may proceed with their purchase since they believe they can afford it.

On the other hand, the uncertainty of when and if current soaring costs of living may level off coupled with further possible interest rate rises - some predictions have them increasing into 2023 and maybe hitting 6% eventually - could dent confidence and cause buyers to hold off their move for a while.

The recent stamp duty changes are permanent - not a short-term measure such as the suspension during the pandemic - so buyers don’t have to worry about beating a deadline. Consequently, they may decide to wait and see how interest rates and inflation pans out going forward.