Borrowing costs

UK housing market outlook darkens as borrowing costs rise

(Bloomberg) – Britain’s property market is bracing for headwinds as rising borrowing costs add to the cost of living crisis that stretches the affordability of property buyers.

Mortgage lenders are following the Bank of England in raising interest rates from historic lows. It makes it more expensive to own a home at a time when prices for everything from energy to clothes are suffering from the worst inflation since the 1980s.

A move towards fixed rate mortgages in recent years protects 80% of mortgage holders from an immediate shock. But higher costs will trickle down when those deals expire and borrowers are forced to refinance, presumably at significantly higher rates.

“Obviously the structure of the mortgage market has changed, so the speed of transmission of policy changes to mortgage rates is a bit slower than in the past,” the BOE’s chief economist said on Friday. Huw Pill. “But we had a pass-through analysis in February. This transmission will take place and will have moderating effects on the housing market. »

The pressure is already being felt on the 2 million households with adjustable rates. Every quarter-point increase adds more than £30 a month to payments on a typical 25-year mortgage taken out today. For new borrowers, the lower interest rates are no longer available.

The British central bank on Thursday raised its key rate for the fourth time since December to 1%, the highest since 2009. It also warns of double-digit inflation and a growing risk of recession.

This is contributing to what is expected to be one of the worst years on record for living standards.

The latest warning came from mortgage lender Halifax, which said on Friday that the pressures facing the economy as a whole cannot be ignored even after house prices rose for a 10th straight month.

“With interest rates on the rise and inflation further squeezing household budgets, it remains likely that the rate of house price growth will slow through to the end of this year,” said Russell Galley, general manager in Halifax.

A similar outlook was painted by the Nationwide Building Society, which said the squeeze on household incomes is set to intensify.

Other data released last week showed mortgage approvals fell sharply in March from a year earlier and the cost of mortgage borrowing rose more than at any time in the past six years.

Cheap money has fueled a housing boom that has driven house prices up 80% since the financial crisis of 2008 and 2009. It has allowed borrowers to take on more and more debt, the new mortgage average hitting a record high of 237,000 pounds ($290,000) in March.

Collecting a down payment remains the biggest hurdle to getting on the housing ladder, particularly in London where the average house is now over £500,000, almost double the national average.

But while the debt burden remains stable, rising interest rates could cause more people to find it difficult to make their payments.

The proportion of households losing 40% or more of their pre-tax income to debt service charges, a measure of over-indebtedness monitored by the BOE, could reach rates last seen in 2006, on the eve of the financial crisis, if rates rise to around 2.5% – a level money markets expect for the first half of next year.

“The psychological impact of a rising base rate above 1%, higher mortgage rates, a squeeze in the cost of living and the gradual rebuilding of supply will all contribute to the slowdown as housing prices real estate come down to earth later this year,” said Tom Bill, head of UK residential research at estate agent Knight Frank.

To be sure, analysts and the BOE expect a slowdown in the breakneck pace of growth over the past year rather than an outright fall in prices.

Factors underpinning the market include a strong labor market and savings accumulated during the pandemic. EY ITEM Club noted that the cost of living crisis is hitting lower-income households the most, who are more likely to rent than own.

“Those expecting a major correction in property values ​​are likely to be disappointed,” said Martin Beck, chief economic adviser at the economic forecasting group.

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