Since the beginning of the year, the UK has experienced a slight upward movement of interest rates.
Purchasing a property will be slightly more expensive for households using bank loans. According to analysts, we expect a rise of 0.25% up to 1% in the least favorable forecasts. However, one thing is certain, rates will undoubtedly rise. Elizabeth Martins, a senior economist at HSBC bank, said for the Bank of England, the question may not be whether to raise rates but by how much.
This is not the first time the Bank of England has raised interest rates. Indeed, the bank has implemented a policy of quantitative tightening and has already raised rates twice in the past. So, epiphenomenon or long-term trend, we will see what are the consequences and the reasons of this interest rate increase. Since last summer, the UK has seen an increase in private sector performance.
One of the reasons for this recovery in the sectors is the increase in consumer spending on travel, leisure and entertainment. Activity in the services sector grew strongly from 54.1 to 60.8. The highest level since June 2021.
The private sector experiences a strong increase in number of contracts in the last month. Increased workloads have led to a significant pick-up in recruitment and rising customer demand has contributed significantly to the UK’s improved economic outlook. Growth was also supported by the final lifting of restrictions related to the COVID crisis. Indeed, the UK economy is recovering from Omicron at a relatively steady pace.
So, what’s the point of raising interest rates? The idea is to control current and future price rises.
Indeed, the central banks of countries lend money to other national banks. The standard interest rate will define the amount that these banks will have to pay to borrow money. They will also lend money to other banks, to consumers in the form of a loan against payment of interest.
Therefore, if the central bank decides to increase its standard interest rates, borrowers will have to pay more interest for the money they have borrowed. This will have a direct impact on their purchasing power, which will decrease. They will therefore consume less, which will influence the current economy.
Therefore, it’s important to see how this increase in interest rates will affect the prestige property market.
The rise in interest rates makes bank loans more expensive for households. This could therefore result in an increase in the cost of mortgages. However, it’s important to note that the vast majority of homeowners will see few changes or no change to their situation. Indeed, only about a third of adults have taken out a mortgage.
A third are renting, a second third have never had a mortgage or have already paid it off. When we analyze the thirds of people who have a bank loan for their property, 74% of these people have a fixed rate. This means that their repayments will only change once the chance of their current contract is over. That’s about 1.5 million fixed rate contracts that will expire this year and 1.5 million by 2023.For the 26% remaining, 850,000 homeowners are on adjustable-rate contracts and 1.1 million are on standard variable rates (SVR). That’s these people who are likely to be immediately impacted by rising interest rates. However, forecasts estimating an increase of between 0.5 and 1%, the impact on households should be small.
Now the question is, what the trend will be for the market in the coming year?
House purchase plans remain strong at the beginning of 2022. Local and international demand for real estate continues unabated and is only slightly affected by the pandemic.
Instead, low-cost mortgages, changing consumer habits over the past year and the end of COVID-19 restrictions are keeping the market very dynamics According to the Office of National Statistics (ONS), the average house price in the UK has risen by around 12% in 2021.
Moral of the story is that despite a rise in interest rates, many experts agree that this growth will continue. The impact of rising interest rates on house prices will depend on the size and timing of the rise. third factor to consider is the supply of available properties. With supply limited and current demand growing, prices should remain high.
In addition, it’s important to note that real estate investments have the particularity of doing very well in a rising interest rate environment. Historically, real estate has been considered a solid hedge in an inflationary situation.
Indeed, property owners will see the value of their property appreciate in line with inflation. In addition, as property development projects become scarcer due to the rising costs of labor, materials etc, supply is reduced, which in turn leads to higher market prices for property.
Therefore, the current situation is changing, the market is dynamic and doing well. Many buyers will decide to finalize their purchases before rates rise too much.
