The UK remains a nation of homeowners, owning two-thirds of all homes. belonging to the people who live in them. But as interest rates rise rapidly, there are fears that many of those households may soon find their mortgage payments unaffordable.
What said a BBC interviewer the new prime minister: “People were worried about whether they would be able to heat their houses. Now they are worried about whether they can keep their homes.”
More expensive mortgages could certainly depress the housing market, with serious effects on the broader economy. This is why governments generally try to keep house prices rising, even as they try to restrain inflation elsewhere. But even under these more difficult economic conditions, it is not certain that house prices will actually fall significantly.
For more than a decade, until 2021, the Bank of England helped promote mortgage affordability with historically low Interest rates. And while households took on more mortgage debt during this period, the cost of paying down that debt kept falling as a proportion of income.
As people took advantage of these low borrowing costs, a million more households became owner occupied between 2015 and 2020. Thousands more used cheap buy-to-let mortgages to acquire additional properties to supplement your job or pension.
The sharp rise in the costs of mortgage debt, relative to borrowers’ income, means that their situation now unexpectedly precariouseven though interest rates are still much lower than they were before 2008.
For those still struggling to climb the ownership ladder, the problems may seem even more dire. Rising house prices are no match for median incomes that have not risen a lot in real terms since 2008.
The mini-boom in homeownership from 2015 to 2020 also tended to stifle political debate about renters who couldn’t afford to climb the homeownership ladder, despite rising home prices has been increasing rental costs.
Meanwhile, for some younger folks, there has been financial help to go from renting to buying from the ever-growing “mom and pop bank,” which is estimated to be worth £25 billion in gifts and loans from 2022 to 2024. But affluent households giving their children a push up the ladder has helped the UK rising wealth inequality.
And while successive governments have pledged to make housing more affordable relaxation of planning laws to speed up the construction of new buildings, their main solution has been to offer more help with the purchase. The Conservatives’ buying aid schemes funneled up to £6bn in this direction. Recent stamp duty cuts they were meant to give a new impetus.
This delicate balance of interests, which allows houses to become more expensive while ensuring that first-time buyers can still afford them, is tricky at best. It is even more difficult to achieve after the turbulent reception of the UK government’s new proposal. recent mini-budget.
Interest rates had already sharply increased since the beginning of 2022, as the Bank of England reacted to inflation reaching 9.9% and the projection that it will peak to 11%, well above the Bank’s 2% target.
The bank may now have to raise its base interest rate much more than it did in September go up to 2.25% – already the highest since 2008 – to prevent financial markets from resuming their pound liquidationwhich has already pushed up inflation forecasts.
The likely result is that new mortgages will be significantly more expensive and more difficult to obtain without a larger deposit. Existing mortgages will become more expensive for those who failed to lock in a low rate before credit markets were thrown into confusion.
Dangers of a falling house price
But this does not necessarily mean that house prices will fall, as fears about mortgage costs and the withdrawal of cheap mortgage offers could significantly reduce demand. Higher interest rates and reduced confidence have already slowdown in housing construction exercise.
The weaker pound will also make UK property, especially in big cities, more attractive to foreign buyers. the homes without mortgage representing 45% of the 15 million owner-occupied homes in England (and 36% of the total) may also be tempted to buy more properties.
But if house prices fall sharply, as some forecasts now suggestcould cause a downward spiral. Distressed mortgage holders would be forced to sell, overwhelming supply and pushing more borrowers into negative equity.
If houses become substantially cheaper, first-time buyers will continue to struggle, as loans for them will also become significantly more expensive. For a falling property ladder to come within reach, it would take a recession of extreme severity, leaving few people feeling safe.