Graphic of British house roof tops in black and white. With a blue line graph over the top of the image. Indicating the interest rate.
Housing Market

Navigating the UK Housing Market and Rising Interest Rates: What You Need to Know

The UK economy has shown improvement with slight growth, an increase in retail spending and better business and consumer confidence this year.

5 min read

Since the beginning of the year, the economic news has been somewhat better than anticipated. There has been a slight increase in growth, and a small rise in retail spending and both business and consumer confidence has improved.

Despite the overall positive trend, there is a notable exception in the housing market. According to the Nationwide building society's report on Wednesday 1st March 2023, property prices declined for the sixth consecutive month in February, resulting in a 1.1% annual decrease in property values.

At the same time, the Bank of England's data revealed that mortgage approvals decreased for the fifth consecutive month, reaching just under 40,000 in January. The data from both Nationwide and the Bank of England indicate that, except for the exceptional circumstances during the first Covid lockdown in spring 2020, the housing market is currently experiencing its weakest state since the aftermath of the global financial crisis of 2008-09.

Despite the decrease in UK house prices, mortgage payments continue to account for a significant proportion of people's earnings.

Percentage of take-home pay represented by typical mortgage payments.

The reason is; after the UK emerged from lockdown, house prices skyrocketed, propelled by the historically lowest interest rates.

The Bank of England's extremely low-interest rates led to a corresponding reduction in mortgage rates, enabling potential homebuyers to obtain more extensive home loans for more costly properties. Earlier this week, the Halifax stated that over the last three years, the average cost of a home has increased by nearly £50,000, or a 20% rise.

Home loans have become more expensive for those with flexible-rate mortgages or whose fixed-rate deals have expired as official borrowing costs have risen from 0.1% to 4%. According to Andrew Wishart, a property analyst at Capital Economics, the average mortgage approval amount decreased by 11% between January 2022 and January 2023, falling from £248,600 to £222,100. This reduction is due to the fact that higher interest rates necessitate borrowers to reduce the size of their mortgage loans.

Although mortgage rates have decreased since the panic conditions that occurred during Liz Truss's brief premiership, they have not decreased enough to stimulate buyer demand. In reality, the decreasing house prices are causing potential buyers to wait in the hope that there will be further declines in the coming months.

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