The annual house price inflation in the UK fell over the past year from 13.8% to just 0.6% as of July 2023. Here, I’ll examine why.
Inflation
Inflation in the UK currently stands at 6.7%. High inflation has been caused by:
- COVID-19 pandemic. People stayed home during the pandemic. They weren’t out spending on socialising, going to the gym etc. so they had more disposable income. With this surplus money, they bought more goods rather than services. This increased demand which outstripped supply and caused prices of goods to increase.
- Russia invading Ukraine. This led to an increase in the price of gas. It also increased the price of food.
- A large fall in the number of people available to work. This was linked to the COVID-19 pandemic. This meant employers had to offer higher salaries to attract people to work for them. To cover these costs, businesses had to increase the prices of their goods and services.
Bank of England Base Rates
The Bank of England has increased base rates 14 times since December 2021 in a bid to beat inflation. At the last BoE meeting on 21st September ’23, the Monetary Policy Committee (MPC) decided to keep the base rate at 5.25%. Everyone breathed a sigh of relief!
The base rate has a knock-on effect on mortgage, loan, or savings account rates.
Annual House Price Inflation
As base rates have increased so have mortgage rates. From the graph below, you can see that house price inflation has decreased from 13.8% to 0.6% over the last year. The effect of the increase in mortgage rates has had a dampening effect on the housing market.
Reasons for the Decrease in UK House Price Inflation
- Those who are currently on a low fixed rate mortgage e.g., 3% who would otherwise sell, and move are deciding to stay put as otherwise they would be on a higher mortgage e.g., 5.75% for the new property.
- First-time buyers may decide to wait it out, continue to rent and see if mortgage rates fall before buying.
- Some buyers who previously qualified for a mortgage of e.g., a 4% interest rate may now not qualify for a higher rate of say, 6%.
- Some buyers may be able to afford a 6% mortgage. However, they do not want to pay such a high mortgage interest rate. Therefore, they sit tight, continue saving, waiting for interest rates and therefore mortgage rates to fall before considering buying property.
- Those who are cash-rich or have a very large deposit and therefore low mortgage may decide to offer well below market value which further depresses house price inflation.
- Those looking to sell their property who can’t get the price they want in this high-interest rate environment may hold tight and wait it out until they can get a higher price.
- The increased cost of mortgage payments may mean that a person’s house becomes unaffordable. Therefore, they sell their property perhaps below market value as they are in a desperate situation. They need to get out from under the large mortgage payments each month.
All the above has the effect of dampening house price inflation.
Opportunity – a Buyer’s market
The dramatic decrease in house price inflation could provide a buying opportunity for:
- cash buyers
- those with a very large deposit, who have e.g., 60% of the purchase price and can therefore avail of lower mortgage rates and payments.
In Summary
The UK housing market has undergone a dramatic change in the past year, as the annual house price inflation dropped from 13.8% to 0.6%. The increase in base rates has led to an increase in mortgage interest rates which in turn dampened demand for housing.
The Bank of England expects inflation to ‘fall significantly in the near term’ and to return to its target of 2% by Q2 2025.
If this is the case, then I would expect base rates and therefore mortgage rates to fall also. This should kick-start the UK property market again.
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