The Bank of England base rate has been sky-rocketing over the past year or so, and it currently stands at 5%. This is expected to increase even more, peaking at around 6.5% by the end of 2023. Under normal circumstances, this would have caused house prices to crash, but this hasn’t happened and is unlikely to ever happen. Why is this?

The relationship between interest rates and house prices

Conventional wisdom dictates that, as interest rates rise, house prices fall. This is because rising interest rates mean more expensive mortgages, which reduces affordability and therefore the demand for home-ownership. However, the relationship between interest rates and house prices is more complex than that, and there are various other factors at play which interact to shape the housing market dynamics.

Supply and demand

One crucial factor that prevents a crash in house prices is the imbalance between supply and demand. The UK is facing a chronic shortage of housing, particularly in areas where there is high demand. This lack of housing then drives up property prices, as demand outstrips supply. Population growth due to immigration and increased urbanisation contribute to the increased demand, counteracting the impact of high interest rates.

Government policies and interventions

Government policies also play a significant role in shaping the UK housing market. Help to Buy schemes, for example, which were introduced to stimulate a flagging market, have enabled more people to buy their own homes, which has prevented a decline in house prices. In addition to this, the Build to Rent scheme, in which homes are built specifically for the rental market and not for sale, has indirectly influenced house prices.

Regional disparities in house prices

House prices vary significantly across different parts of the UK. While some areas, such as London, experience rapid growth in property prices, others see stagnation or even a slight decline. This regional disparity can mask the overall impact of high interest rates, as localised factors and economic conditions influence the housing market.

The influence of the Buy-to-Let market

The buy-to-let market, where investors purchase properties in order to rent them out, has a substantial impact on the housing market as a whole. Despite the high interest rates, investors are still attracted to the rental income potential, and this increased demand from would-be landlords helps to keep house prices high, especially in areas with a strong demand for rented accommodation.

Foreign Investment in UK Property

Foreign investors, especially from countries with uncertain political or economic situations, see the UK property market as a safe haven for their investments. This influx of foreign capital helps to keep house prices up, regardless of high interest rates. London, in particular, has been a target for international property investors, which has driven up property prices in the city.

Stricter mortgage lending criteria

Banks and financial institutions now have very stringent criteria for mortgage lending, which in turn can act as a buffer against potential price crashes. These criteria ensure that borrowers meet specific financial requirements, reducing the risk of default and maintaining stability in the market.

As you can see, there are many interplaying factors in the housing market, which all have varying degrees of impact, explaining why there has not been a drop in house prices following the increase in interest rates. The unique characteristics of the UK housing market make it resistant to a sharp decline in prices.

Will there be a house price crash in the near future?

It is difficult to predict the future of the housing market with any certainty. However, the presence of multiple factors that contribute to price stability suggests that a significant crash is unlikely without a severe economic shock or a substantial shift in market dynamics.

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