Towards the end of last year, we went into great depth about what we thought 2022 had in store for house prices and overall market activity. Experts across the industry were coming forward and making their predictions, most forecasting a slowdown in activity but still a healthy market. The slowdown has already begun, slightly faster than was expected. January saw residential property transactions fall by a fifth compared with the previous month, due to a shortage in new homes for sale, among fast-rising inflation and stark increases in interest rates. What we were not expecting was the invasion of a European country.
Despite this, the UK, fortunately, has a very small amount of UK trade links with Russia. Most of the invasion will be felt in energy bills and gas prices – particularly oil, having hit a seven year high of £74 a barrel yesterday. In a response to these higher costs of living, on top of surging inflation, the Bank of England could think twice about increasing interest rates any further, having already hiked them up twice in the past three months. Uncertainty and increased costs of living could encourage the Bank of England to navigate away from the supposed plan to hike rates up again in March, forecasted by economic experts.
On the contrary, taming inflation has been an obvious goal for the Bank of England since the beginning of the year. Inflation currently stands at 7.5%, the highest it has been in four decades. Economic uncertainty could be enough to deter another hike, but at the current rate of inflation, the Bank of England could be tempted to increase interest rates regardless. This would be the first time since 1997 that interest rates have been raised three meetings in a row.
What would this mean for the housing market?
Higher interest rates, of course, make borrowing more expensive. This has a direct impact on standard variable mortgages. Increases in costs of energy and gas will increase the costs of owning a home and, combining these factors, buyers may be deterred from moving into a new home – possibly encouraging home sellers to lower their prices.
Melissa Lawford of The Telegraph said that “Any rate rise will hit hard in the wake of rapid house price growth that has dramatically reduced affordability. In short, it will trigger the end of the house price boom”.
