A hotter than expected housing market has given the UK’s biggest high street lenders a bumper autumn, but analysts have warned that rising mortgage rates risk reining in buyers and slowing runaway price growth.
Several UK banks reported strong mortgage demand in their third-quarter results last week, including Santander, NatWest and Lloyds.
The results point to the enduring strength of the UK’s housing market, even after the removal of the government’s stamp duty holiday in England at the end of September, and contrast with expectations of a slowdown or even a crash.
“The structural factors [driving sales] include things like relatively low unemployment and . . . low interest rates,” said Charlie Nunn, chief executive of Lloyds. “I also include people’s housing preference in terms of moving to new locations to find more space . . . [and] technical factors, in particular the stamp duty holiday.”
But a sustained rise in the Bank of England base rate, which would mark a reversal of around 30 years of monetary policy direction, could slow that growth by making borrowing more expensive. Markets are betting that interest rates could rise from 0.1 per cent to 1.25 per cent by the end of 2022.
In response to rising inflation and in anticipation of an increase in interest rates — possibly as soon as this week, when the BoE’s Monetary Policy Committee meets — lenders have been raising their mortgage rates over the past few weeks.
HSBC, NatWest and Barclays have increased rates on fixed-rate deals in the last week. This emulates moves by Halifax, Nationwide and Santander and reverses the trend seen throughout the pandemic, during which rates were driven lower and lower by fierce competition.
Ultra-low rates have been one factor pulling people into the housing market, said Richard Donnell, head of research at property portal Zoopla, who cited a potential rate hike as one of a trio of headwinds. The others were a dwindling supply of homes coming to market and sellers “getting too ambitious about what they think their homes are worth”.
Zoopla forecasts that house prices will increase by 3 per cent next year, a far more moderate gain than the double-digit leaps seen across the UK in the past 12 months.
But Donnell is sanguine about the impact of mortgage rate rises. “Demand for housing is still 30 per cent above the five-year average and sales are 15 per cent above,” he said. “There are more people who are more committed to moving home, there’s no sign of any stamp duty cliff edge at all and a lot of people have made a lot of money from their home in the last year for the first time in a long time. That’s bringing them into the market.”
Sonali Punhani, chief UK economist at Credit Suisse, played down the potential impact of the BoE raising rates on mortgage affordability. “80 per cent of the stock of current mortgages are fixed rate, even though these terms are short, two-to-five years. The consequent rise of household debt servicing should be limited and manageable,” he said.
Rising mortgage rates would hit those with limited savings hardest, such as younger first-time buyers who have been increasingly frozen out of the market due to spiralling prices in the last year and half.
According to the government’s English Housing Survey, the pandemic has allowed homeowners to save, but left those in rented accommodation with less cash at their disposal, making building up a deposit harder.
Where younger buyers were making their first step on to the housing ladder, they were increasingly reliant on the “bank of mum and dad” because of runaway house price inflation, said Noble Francis, economics director at the Construction Products Association.
Beyond rising mortgage rates, the real risk to the sustainability of the current housing market boom was that affordability would get stretched to breaking point, Francis said. “If demand [for homes] is greatest in the most affordable areas, then what happens when you have 18 months of house price inflation in those areas? They are no longer affordable.”
Rising mortgage rates could cool UK housing market, say analysts
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