Will the Increase in the Cost of Living Affect House Prices?

We have now seen interest rates increase for the third time in four months as the Bank of England tries to calm the rise in the cost of living. The rise to 0.75% from 0.5% on March 17th means rates are now at their highest level since March 2020, when the pandemic began. With the current fuel price crisis and a conflict that is further pushing up the cost of fuel and food, we are entering a cost-of-living crisis not seen since the 1970s.

Surprisingly, although people’s ability to afford a new home is at a record low, this doesn’t look set to crush the housing market.

Last month, a record 43% of sellers exceeded their asking price compared to just 16% in 2019. Although ‘offers over’ is commonplace in Scotland, it has become the new normal across the UK. First-time buyers have been the most likely to pay over the asking price with half doing so in February and when it comes to property investors, 38% of landlords bought their properties for more than the asking price last month.

These figures reflect a property market that is showing no signs of cooling. House prices have exceeded everyone’s expectations and the expected new year slowdown didn’t materialise. Instead, house prices went up by 10.8% in the year to February, making it the sharpest growth in house prices since 2007 according to Halifax.

Wage inflation has not kept the pace with soaring house prices, making affordability difficult for many buyers. They currently need 7.7 times their income to afford the average home (Capital Economics) in the UK although that figure is much lower in Scotland (around 4 times their income). The issue of affordability has been asked by historically low mortgage rates and savings bolstered from the pandemic. High inflation and the rising cost of living my now undermine this as we could now see faster, and higher interest rate rises.

This is likely to slow market growth and could be particularly problematic for first-time buyers due to soaring inflation. Since October 2021, mortgage rates have gone up and borrowers are paying more interest each month as a result. However, even if interest rates went up by 2% over the next 12 months, mortgage payments would still be lower than they were during the previous market crashes and commentators at Capital Economics don’t believe that house prices would collapse. Instead, they believe that strong house price growth will continue until the summer months with higher mortgage rates dampening buyer demand by the end of the year.

The sharp rises in house prices are a result of the lack of supply. If this continues, house prices will continue to rise. However, there are signs that this is starting to ease off. According to Zoopla, new property listings were 5% higher above the five-year average in February. This will a few months to impact the property market – at which point we will start to see more ‘normal’ levels.