Another month, another base rate hike. As pressures build on the housing market, might interest rates be the straw that breaks the camel's back?
The Bank of England did it again - the base rate has been increased by 0.5% to 1.75% as the Bank tries to get inflation under control. The move was widely anticipated but the size of the hike made the announcement a big moment.
While this will be a blow to those on variable mortgages, the effect will be delayed for most borrowers as 75% are on fixed rates. Only when those fixes come to an end will the pain be felt.
Interest rates and house prices
Intuition says that interest rates and house prices should move in opposite directions - as rates rise, prices fall and vice versa. But is that really the case? Property data company Twindig looked back over the last 40 years to find out if that correlation stands up to scrutiny.
The desire to move house
There are two main reasons why people move home. Necessity and aspiration.
Banks' willingness to lend
The 2008 financial crisis saw an abrupt halt to mortgage lending. As a result, the housing market lost a major part of its demand, pushing house prices down by more than 15%. Only when the banks were recapitalised did lending return and house prices recover.
In 1988 the property market hit an artificial peak due to the ending of MIRAS tax relief. Shortly afterwards, interest rates shot up to 15%. As a result, mortgage repayments became unaffordable for many and a wave of repossessions followed. House prices fell.
Will house prices fall?
Twindig's research demonstrates that interest rates on their own are unlikely to drive down property prices. Aspirational purchases are higher than pre-pandemic levels. Banks continue to lend and high levels of forced sales look unlikely.