Zoopla: BOE interest rate decision and what it means for the housing market
Zoopla comments on today’s Bank of England interest rate decision and what it means for the housing market.
Richard Donnell, Executive Director of Research at Zoopla, discusses the implications of the BoE interest rate decision.
The UK base rate continues to increase but mortgage rates are close to peaking. Higher mortgage rates don’t have the same impact across the housing market so the outlook depends on where you live.
Base rate rises but expectations soften:
The Bank of England has raised rates again to 5.25% in an effort to reduce demand and cool price inflation. City expectations of how much higher interest rates need to rise have moderated in recent weeks. Most expect only one or two more small increases rather than the need for base rates to rise above 6% which was the view a few weeks ago.
Mortgage rates for fixed-rate deals are close to peaking:
This cooling in market expectations for base rates has led to a fall in the underlying cost of finance for fixed-rate mortgages. Some banks have already started to reduce mortgage rates as a result. These are modest reductions so far, but a sign mortgage rates are peaking. We expect mortgage rates to fall further in the months ahead but how much depends on the outlook for inflation and what this means for City expectations for base rates. We could well see sub 5% mortgage rates return this autumn.
87% of mortgagees on fixed-rates:
The vast majority of people buying homes in recent years have taken mortgages with fixed-rates. Almost 9 in 10 outstanding mortgages are on fixed-rates meaning today’s rate rise will not have an impact on their monthly repayments. However around 15% of mortgage holders will see their fixed deal come to an end in 2023, meaning the need to refinance onto higher rates and pay an extra £200-£250 per month on average.
The remaining 13% of mortgagees are on variable rates which means higher mortgage repayments straight away. The fact over 1 in 10 loans are on variable rates probably reflects those with smaller loans where changes in rates have a much smaller impact on their monthly repayments.
Jump in borrowers paying down mortgages:
Households with access to savings are paying down mortgage debt at a much faster rate as they look to reduce the impact of higher rates. This trend is being exacerbated by lower savings rates which makes paying down debt more attractive, especially for those who are higher rate taxpayers. Mortgagees are paying down an extra £2.2 billion a month over and above regular debt repayments, 66% higher than the 10-year average.
Higher mortgage rates do not have a uniform impact:
The rise in mortgage rates has hit demand from new buyers by 18% over the last 2 months. Sales have also slowed but we haven’t seen a drop in activity as severe as the period immediately after 2022’s mini budget. Home buyers are accepting that we are returning to a period of more normal mortgage rates in the 4-5% range rather than the ultra low, sub 2% mortgage rates of recent years.
Higher mortgage rates hit harder in higher value housing markets where the size of the mortgage is larger and buyers need a larger income to buy. Our house price index shows prices falling across southern England as the hit to buying power pushes prices lower.
However, in the north of England and Scotland house prices are still rising as the impact of higher mortgage rates is less pronounced. These trends are explained by the income needed to buy and how accessible the market is for first-time buyers. It’s cheaper to buy than rent at 5.5% mortgage rates across lower-value housing markets in the north of England and Scotland. In contrast, in southern England, would-be first-time buyers face much greater challenges which weakens demand and keeps house prices under downward pressure.
House prices to fall 5% over 2023 (but still 15% higher than pre pandemic):
Higher mortgage rates have reduced the buying power of households and this will need to be reflected in house prices which fell at the end of 2022 but started to increase this spring as mortgage rates reduced to 4%.
Now mortgage rates are rising again we expect further modest price falls in the second half of 2023. Overall we expect the average UK house price to fall 5% over 2023 but they will still remain 15% higher than the start of the pandemic.
The longer term outlook depends on the strength of the economy and labour market and how long mortgage rates remain over 5%. We expect house price growth to remain very low over 2024 and into 2025 as the market adjusts to higher borrowing costs.
There is no quick rebound in prospect as mortgage rates start to fall and anyone serious about moving needs to set their price carefully if they want to move home.
Richard Donnell comments further:
“Although the base rate has increased further today, it’s not all doom and gloom for the housing market.
“There are signs that mortgage rates are peaking and 87% of mortgages are on fixed rates.
“For homeowners and would-be buyers who are impacted by mortgage rates, it’s important to note that the impact is not uniform across the UK.
“Higher mortgage rates hit harder in higher value markets in Southern England where a larger deposit and income are required to buy with a mortgage.
“In contrast, in the north of England and Scotland, house prices are still rising as the impact of higher mortgage rates is less pronounced.
“In certain areas in these regions, it’s also still cheaper to buy than rent at 5.5% mortgage rates.”
Kindly shared by Zoopla
Main article photo courtesy of Pixabay
