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What Could Happen To The Housing Market With Interest Rates Rising?

John Castro
John Castro

World events have been pretty big since 2016.

That’s putting it mildly.

Brexit in 2016 kicked it off.

Since then, interest rates have rapidly risen to their highest point in 27 years.

Inflation is predicted to reach 13% by as early as the end of 2022.

Recession on the horizon.

Cost of living crisis.

And, of course, the economic fallout of the Covid pandemic and lockdowns.

The invasion of Ukraine by Russia in February this year has added even more misery, fear, and uncertainty to an already battered world’s socioeconomic infrastructure.

Yet despite this, the housing market has remained impressively strong, defying expectations again.

You could say it was thriving.

The market in recent years

When the UK voted to leave the EU, commentators were forecasting that market uncertainty would see property valuations plummet.

On the contrary, fundamental analysis has revealed that average UK house prices have risen over the last five years from £213,000 to £281,000.

Remarkably, much of this growth has been since 2020.

Data from the Office for National Statistics showed that in July, UK house prices increased at the highest annual rate since May 2003.

And HM Land Registry data shows that house sales in August this year were 114,440.

That’s up 4.4% from July and 9.7% higher than August 2021.

Annual house price growth was 15.5% during the month, up from 7.8% in June – the most considerable increase in 19 years.

The average UK house price was £292,000 in July 2022, which is £39,000 higher than last year’s.

Currently, because demand outweighs supply, housing prices still need to drop.

The number of potential buyers is currently higher than the 5-year average at 61%.

Homes on the market are lower than expected by 37%.

However, the big question is should interest rates continue to rise, will the housing market finally crumble?

It is hard to predict, and expert opinions are divided.

There are signs the property market could be heading for its biggest test since the global financial crisis in 2008.

Halifax says house prices did have a 0.1% wobble between June and July.

And back in May this year, Capital Economics forecasted a 5% price drop over the next two years.

Others are predicting the drop could be as much as 15%.

One thing is clear

Interest rate hikes are and will have a big impact on those looking to become homeowners and those already with a home property asset.

First-time buyers will struggle, as one online investment seminar pointed out.

Homes that were affordable, no longer are, as fixed-rate mortgages are much higher than they were only months ago.

Those with variable rate and tracker deals are already suffering.

And homeowners needing to remortgage when the expiration date arrives will also feel the pinch with their new deals.

What about Rentals?

It is a similar story for people renting.

Demand for flat rentals has rocketed.

Rents have soared.

The average rent is over £1,000. That’s £115 more per month than a year ago.

As for the buy-to-let market, it is likely to be as volatile.

Landlords are already passing the increased mortgage repayments onto tenants with rent increases.

Some are selling to ensure a better price.

The stamp duty holiday announced by the government in September may also have a significant impact.

The UK government also introduced the stamp duty holiday in September.

It is usually a sign the government is concerned about the housing market and is hoping to encourage buyers.

However, this may only work as stimulating demand with an increase in supply would push prices up.

This supply and demand was a significant factor during the market rush over the past couple of years because many homes changed hands at well above the initial asking prices.

Investing for beginners in the housing market throws up a lot of challenges to consider.

Who would benefit from a housing market crash?

It is a simple answer.

Those who already own a home or buy-to-let will not profit from the slump in price valuations, especially if they consider selling soon.

A crash might also put them into negative equity.

On the other hand, those looking to get on the property ladder will benefit from a fall in prices.

According to the Office for National Statistics, the average home is currently around 8.7 times higher than average wages.

Lenders generally cap borrowing at 4.5 times income.

Any fall in house prices gives the new investor a sizeable leg up the ladder.

Is now a good time to buy?

As any good investment course will tell you, timing the market is never a solid strategy.

Like many things in life, investing is a risk.

But trying to “guess” how markets and assets will move is very risky.

Probability, however, is a whole different thing.

At this moment, interest rates will probably climb higher.

That means mortgages will cost more.

Also, houses are generally regarded as long-term investments in the property market.

You can only make profits on house sales slowly with other investment assets such as stocks and cryptos or commodities.

That’s simply because selling and buying houses can take months.

Investing and trading with other assets is far more straightforward, as many online courses dealing with trading investments will reveal.

So what to do?

If you are already on the property ladder, it is good to remain where you are rather than moving or seeking a new mortgage deal.

You may even lose money if you decide to gamble and sell, which is not good.

The same applies for those hoping to enter the housing market for the first-time but are unsure about how the rate rises will affect their affordability.

You can always seek professional help.

Or even go on an investment course.

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