From the time the Covid-19 pandemic hit, 2020 to 2022, there have been significant hikes in house prices caused by panic buying of houses, income aid from the government as well as low interest rates. Interest rates determine house prices.
Interest rates are important to the housing market because they determine how much one will have to pay to borrow money and in the property market that refers to mortgage. They also influence the value of the real estate. It is, therefore, true to say that low-interest rates mean credits become affordable therefore there is an increase the overall demand for property and as a results, drive up prices. High interest rate on the other hand, increase the cost of credit that means very few can afford mortgage loans for a home therefore, lowering the demand for property.
Danielle Hale, the chief economist for Realtor.com says that there is an expected increase in house prices by a whooping 2.9 per cent in 2022 while home sales are expected to rise by 6.6 per cent. A 2.9 per cent increase may appear small but is by all means crippling to an average British income earner. It simply means fewer people are be able to afford buying homes and keep up with increased interest rates, especially on mortgages. More and more people barely have disposable income, leave alone a debt to income ratio that qualifies for a mortgage loan.
What does the house price entail?
Housing prices are described using the following tenets: housing rent prices indices, real and nominal house prices indices, and ratios of price to rent and price to income.
What causes interest rates to hike?
Demand and supply
Demand and supply are influenced by demographics, the state of the economy, taxes, and availability and cost of credit. Money supply and interest rates have a reciprocated relationship. A larger money supply lowers interest rates, making it less expensive for consumers to borrow. There is a ripple effect as: the more the supply of cheap credit, the higher the demand, and the lower the housing prices. The opposite is true. The more expensive credit is, the lower the amount of money at hand and the demand for house ownership, resulting to higher pricing.
There is an alarming inflation rate globally. According to the International Labour Organization, the annual rate of inflation worldwide, as measured by the consumer price index (CPI), accelerated to 9.2 per cent in March 2022, up from 7.5 per cent in February 2022, 6.8 per cent in January 2022 and 6.4 per cent in December 2021.
Recently, inflation is majorly contributed by the Ukrainian invasion by the Russians. This invasion has seen an overall rise in living costs, with the average utility bill increasing by £ 693. The cost and supply chain of gas and electricity are the most hit. In the United Kingdom, in 2021 alone, there is a 2.6 percent recorded inflation rate from the 0.19 percent experienced in 2020. The Bank of England predicts a 10 percent rise in the inflation rate by 2022.
Inflation generally reduces the purchasing power and disposable income of an individual. Therefore, lending firms will increase interest rates to compensate for the lost or reduced purchasing power caused by inflation. This reflects on the house prices and mortgages. Again, as mentioned earlier, an increased cost of debt will repel potential homeowners, reducing demand and increasing house prices.
“For now, at least, despite the current economic uncertainty, the strong increases we’ve seen in house prices show little sign of abating. However, the headwinds facing the wider economy cannot be ignored. The house price to income ratio is already at its highest ever level, and with interest rates on the rise and inflation further squeezing household budgets, it remains likely that the rate of house price growth will slow by the end of this year”, Russell Galley, Managing Director from Halifax quotes.
Governments, through the Federal Reserve, depending on the state of the economy, can manipulate lending rates across all money lending entities.
As a person looking to own a home or as a realtor, to be on the safe side, you may want to be on the lookout for any communication by the Feds or, hopefully, another stamp duty land tax reduction.