As new interest rates continue to rise and the Bank of England predicts a recession, mortgage repayment rates are expected to rise and have a knock-on effect on rent prices
UK inflation rose to 10.1% from 9.4% in just two months, according to the Office for National Statistics and the Bank of England expects it to rise further, possibly reaching 13.3% in October. New interest rates will follow, currently at 1.75%, and will have an unavoidable impact on homebuyers, landlords and renters across the UK.
Economic projections range from interest rates climbing higher, or even a housing market crash on the horizon.
The Bank of England stated that the rise in interest rates was necessary due to persistent external pressures
Despite the Bank’s attempt to widen the borrowing pools through less restrictive mortgage rules, the impact of these pressures will still be reflected on rising domestic prices, wages outpaced by soaring inflation, and even higher mortgage repayments.
This is on the backdrop of a 10% year-to-date depreciation of the British pound sterling against the US dollar and an indication from the Federal Reserve, the US central bank, of a further interest rate increase by 0.5% or 0.75% in September.
Michael Hewson, chief market analyst at CMC Markets commented: “The UK currently fares worse than both the EU and the US. This is due to its closer dependence on energy shocks than the States and less government intervention to soften the blow compared to its European counterparts.”
How will new interest rates affect house prices?
CMC Markets analysed the latest data for June 2022 from HM Land Registry, published on August 17th, and concluded that the likely tendency for house prices is in a temporary slowdown.
Mark Hewson suggested that the demand for homes has decreased in light of the general economic turbulence: “Most buyers are weathering the storm for a few more months at least, while some are also working out how the cost-of-living crisis will pan out in the medium term so that the new mortgage is not squeezing their pockets beyond their comfort zone.”
CMC Markets expects interest rates to further rise to 2.25% in September.
This directly impacts mortgages on variable rates – around 1 in 5 households in the UK – and another 3.1 million whose fixed-rate periods expire in 2022-2023, according to UK Finance estimates.
Fixed rate periods offer some security to those still keen to get on the property ladder but are only a medium-term solution- and buyers should be aware they may face higher than anticipated repayments when the fixed rate period expires.
The new variable rates are at the lender’s discretion and may be higher than typical to begin with.
Borrowers whose repayments are directly linked to the base rate, as set by the Bank of England, will now face mortgage repayments at rates between 3% and 4%, up from 1.75% and 2.75% only five months earlier. This will inevitably spill into rent prices.
How will new interest rates affect renters?
Faced with increasing mortgage repayments, landlords may pass the expense onto tenants by increasing their rent or sell the property to beat any potential market crash.
With a bleak economic outlook over the next two years, Hewson advises that landlords err on the side of caution for now.
“Those already on the property ladder are generally better off staying put rather than moving or re-mortgaging. They would not get a good deal on their old house in this market and may likely end up losing more money overall.”
The impact of a second wave of inflation on the construction industry
The same external pressures that have an impact on domestic life will also affect industry, from supply chain issues to how a drop in housing demand may decrease projects. Within the industry, re-evaluation of price points may be necessitated, as Bricys CEO Rahul Kejriwal warns:
“Construction bosses from major firms including CRH and Berkeley Group have sounded the alarm about a second wave of inflation, warning that spiralling energy prices will significantly drive-up build costs. This news should also serve as a warning to the BIM sector serving the construction industry about the sustainability of increasingly punitive, inflexible software pricing models.
“To encourage wider adoption of BIM in construction right now – and ensure more users and greater collaboration as our technologies grows – then our collective approach to pricing needs to be much more imaginative and much less rigid.”
A recession on the horizon
Other than adjusting the interest rates to the accurate level to keep abreast of import inflation, the economic projections for the UK paint a bleak outlook for the next two years.
The UK is projected to enter a recession in the final quarter of this year, the Bank of England announced. The country’s economy will contract by 1.25% in 2023 and 0.25% in 2024, however, inflation is becoming a much bigger long-term threat, with unrealistic chances of falling back to the desired 2% much before 2024.
The current political race for the Conservative Party leadership and the consequent fiscal policies promoted by the new British government is a major factor to take into account for any inflation, GDP, and unemployment projections and investment decisions.
As it stands with the current measures, inflation is expected to peak at 13.3% in October – a sharper increase than the Bank anticipated in June, originally estimated at 11%. It will continue to rise throughout 2023 only to decline in 2024.
Meanwhile, forecasts for the Consumer Price Index (CPI) are less optimistic now, expected to decrease only to 9.5% in the third quarter of 2023, although the Bank anticipates a sharp fall in prices immediately thereafter.
Selling prices are set to increase to reflect rising costs while real household post-tax income is expected to plunge in 2022 and 2023. The Bank predicted that core prices will peak at 6.5% this year, meaning that, in the following six months, food and energy will constitute more than half of the headline CPI.
The next meeting for the Monetary Policy Committee, where the Bank of England will decide what the new base interest rates might be, is set for September 15th.
