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Will a 1% rise to BOE Base Rate really lower house prices ?


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Hi All,

Been looking actively at this forum for past 6 years now, finally decide to make an account because of the craziness in the housing market.

I keep hearing that rates will go up, but i am just at a loss as to what actual impact this will make on demand and supply of housing.

Thought i would view and offer on a few properties over the weekend in the South East. Realised that however much i put down i am getting out bid by £50,000 - £100,000, on top of what the actual prices should be right now. On top of this, noticed a lot of speculative properties being put on for insane prices only a few weeks later to be withdrawn with the agent saying they couldn't find anywhere to move.

Pandemic feels like people have saved up a big chunk of money and those fortunate to work from home have saved a lot on travel (rail, petrol, car) and put this towards inflating the prices. Seems also like people are selling in richer areas moving to more cheaper areas, where in the past no one with a brain would dare touch. In relative terms, the  stamp duty holiday feels like insignificant, like getting a free car service with your brand new Lamborghini.

Therefore any increase in the base rate is likely to not make a major impact i think........ so if like me you arent a homeowner we're all doomed!

What's anyone here thinking?

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30 minutes ago, TheResponsibleHouseBuyer said:

Hi All,

Been looking actively at this forum for past 6 years now, finally decide to make an account because of the craziness in the housing market.

I keep hearing that rates will go up, but i am just at a loss as to what actual impact this will make on demand and supply of housing.

Thought i would view and offer on a few properties over the weekend in the South East. Realised that however much i put down i am getting out bid by £50,000 - £100,000, on top of what the actual prices should be right now. On top of this, noticed a lot of speculative properties being put on for insane prices only a few weeks later to be withdrawn with the agent saying they couldn't find anywhere to move.

Pandemic feels like people have saved up a big chunk of money and those fortunate to work from home have saved a lot on travel (rail, petrol, car) and put this towards inflating the prices. Seems also like people are selling in richer areas moving to more cheaper areas, where in the past no one with a brain would dare touch. In relative terms, the  stamp duty holiday feels like insignificant, like getting a free car service with your brand new Lamborghini.

Therefore any increase in the base rate is likely to not make a major impact i think........ so if like me you arent a homeowner we're all doomed!

What's anyone here thinking?

There is a great need for housing throughout England in particular. It must be remembered this need is likely to grow over the coming years as the population continues to grow quickly.

The only way I can see that house prices will fall nominally is if they become less affordable to the point it is out of reach of the next purchaser.

The base rate doesn’t correlate exactly with what an available mortgage rate you could get could be. At this time there is still excess money in the banking system trying to find very safe investment even at very low returns, so it also depends as to how much extra money is available and at what cost.

This is likely to be a protracted event and if as I believe we start to see higher and higher inflation over the coming years interest rates will slowly start to rise. It is possible in a very high inflation environment real house prices fall considerably but nominal prices maybe fall slightly or rise slightly or even stay the same which is a real possibility.

So as the base rate slowly starts to rise, and liquidity slowly starts to dry up mortgage rates offered will begin to get more expensive.

House prices are fairly stable generally and tend not to change dramatically so it could take longer than anyone thinks for prices to fall and if this scenario came about a long denial stage would take place. The auction house with destressed sales will start any possibly larger correction.

I think there is much more inflation already in the system than the BOE think (or admit to). It is a well-known fact on this forum the FED and the BOE will hold the base rate as low as possible for as long as possible. I think that it is possible that the base rate in the UK will still be under 1.5% going into 2023 by this time inflation will have started to have devalued the debt to some extent. I cannot see how they can hold at these low rates going beyond the beginning of 2023 or how any further stimulus is possible so with inflation above 10% which I believe will be the case, that is when we are likely to see some sort of correction in many asset classes, what form it will take exactly is very difficult to predict.

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2 hours ago, TheResponsibleHouseBuyer said:

Hi All,

Been looking actively at this forum for past 6 years now, finally decide to make an account because of the craziness in the housing market.

I keep hearing that rates will go up, but i am just at a loss as to what actual impact this will make on demand and supply of housing.

Thought i would view and offer on a few properties over the weekend in the South East. Realised that however much i put down i am getting out bid by £50,000 - £100,000, on top of what the actual prices should be right now. On top of this, noticed a lot of speculative properties being put on for insane prices only a few weeks later to be withdrawn with the agent saying they couldn't find anywhere to move.

Pandemic feels like people have saved up a big chunk of money and those fortunate to work from home have saved a lot on travel (rail, petrol, car) and put this towards inflating the prices. Seems also like people are selling in richer areas moving to more cheaper areas, where in the past no one with a brain would dare touch. In relative terms, the  stamp duty holiday feels like insignificant, like getting a free car service with your brand new Lamborghini.

Therefore any increase in the base rate is likely to not make a major impact i think........ so if like me you arent a homeowner we're all doomed!

What's anyone here thinking?

Uk house market is run on term funding, which suppressed mortgage rates. 

If they raise rates and keep thar going, no idea what will happen

 

1% interest rates is not going to stop 5% inflation now. If inflation shoots up to 10%, what then 5% rates? 

 

At some point an almighty collaoses of something is going to happen. 

The idiots on here have predicted this for many years. 

Can't say it gives any joy being right 

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5 hours ago, TheResponsibleHouseBuyer said:

Hi All,

Been looking actively at this forum for past 6 years now, finally decide to make an account because of the craziness in the housing market.

I keep hearing that rates will go up, but i am just at a loss as to what actual impact this will make on demand and supply of housing.

Thought i would view and offer on a few properties over the weekend in the South East. Realised that however much i put down i am getting out bid by £50,000 - £100,000, on top of what the actual prices should be right now. On top of this, noticed a lot of speculative properties being put on for insane prices only a few weeks later to be withdrawn with the agent saying they couldn't find anywhere to move.

Pandemic feels like people have saved up a big chunk of money and those fortunate to work from home have saved a lot on travel (rail, petrol, car) and put this towards inflating the prices. Seems also like people are selling in richer areas moving to more cheaper areas, where in the past no one with a brain would dare touch. In relative terms, the  stamp duty holiday feels like insignificant, like getting a free car service with your brand new Lamborghini.

Therefore any increase in the base rate is likely to not make a major impact i think........ so if like me you arent a homeowner we're all doomed!

What's anyone here thinking?

I made a little table you might find interesting. It assumes someone can handle £1500 per month mortgage payments and shows how much capital that would let them borrow at different mortgage rates, which as has been pointed out, is indirectly driven by amongst other things, the base rate.

Screenshot_20211022_224529.jpg

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I think a 1% rise has a big enough impact on mortgage rates to perhaps dissuade someone from bidding 325k in favour of 310k or even 300k. 

During spring 2020 we dismissed a property around the 350k mark but 18 months on the cost of that over a 5 year fix has come down over £100 per month. Partly because of clearing the existing mortgage but largely due to the typical 5 year rates edging down over that period. 

So we’re an example of a family that will borrow according to the cost of the mortgage which is dependent on the rate. 

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49 minutes ago, SE10 said:

I made a little table you might find interesting. It assumes someone can handle £1500 per month mortgage payments and shows how much capital that would let them borrow at different mortgage rates, which as has been pointed out, is indirectly driven by amongst other things, the base rate.

Screenshot_20211022_224529.jpg

So assume if UK interest rates were at the average (prior to 2008)  of 7.25% the £400,000 property will be down to £213,000 or less ? 

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1 hour ago, SE10 said:

I made a little table you might find interesting. It assumes someone can handle £1500 per month mortgage payments and shows how much capital that would let them borrow at different mortgage rates, which as has been pointed out, is indirectly driven by amongst other things, the base rate.

Screenshot_20211022_224529.jpg

This is absolutely key. FTBs (and to a much lesser extent BTLers) are essential to feeding high property prices and if you begin with the reasonable assumption that they will offer what they can afford (borrow) then you can see from your table how a small base rate rise can affect prices.

A 1% rise would approximate to a 10% drop in purchasing power alone and this doesn't take into account cost of living, tax increases etc. which lenders will for sure be taking into account moving forward.

Will rates rise any higher? Doubtful imo but who knows, besides most here know how sentiment works when prices begin to fall (particularly given that a higher percentage of housing stock than ever are essentially investments (and I'm sure more than a few property investors will be aware that we are heading towards the end of the 18 year cycle anyway.. )

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3 hours ago, SE10 said:

I made a little table you might find interesting. It assumes someone can handle £1500 per month mortgage payments and shows how much capital that would let them borrow at different mortgage rates, which as has been pointed out, is indirectly driven by amongst other things, the base rate.

Screenshot_20211022_224529.jpg

That's an interesting chart. 

So in basic terms, from the chart, are we talking an average 3-5% mortgage rate to bring  prices back to pre 2008 levels?

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8 hours ago, Dweller said:

So assume if UK interest rates were at the average (prior to 2008)  of 7.25% the £400,000 property will be down to £213,000 or less ? 

I don't think it'd be quite that straight forward, there will be other factors involved should mortgage rates reach ~7% such as inflation, deposit size, sentiment and forced sellers.


However, while historically property has been a good inflation hedge, I don't believe its ever been the case before that property at the start of a period of rising inflation has been pumped up so much by low interest rates and so been so vulnerable to the response to rising inflation.

 

Ultimately what the table shows is that a normalisation of mortgage rates means that in order for an FTB or BTL to buy at a price that sustains current price levels they're going to have to find a large and new source of funds that isn't a mortgage. The question is what is that source?

It also suggests someone remortgaging after the first 2 years of their 25 year term may be having difficulties. Maybe the government will introduce Help To Not Sell? But if rates are that high debt servicing costs will be high for the government as well so could they afford it?

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11 hours ago, Dweller said:

So assume if UK interest rates were at the average (prior to 2008)  of 7.25% the £400,000 property will be down to £213,000 or less ? 

Not quite because not everyone is buying with 100% mortgage - some is deposit - and that average looks high to me if you look over a longer time frame…if you look over the last 200 years day - it’s more like 4-5%.

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12 hours ago, SE10 said:

I made a little table you might find interesting. It assumes someone can handle £1500 per month mortgage payments and shows how much capital that would let them borrow at different mortgage rates, which as has been pointed out, is indirectly driven by amongst other things, the base rate.

Screenshot_20211022_224529.jpg

This table highlights exactly why rates will not go up by any substantial degree and as others have pointed out, at most a token gesture.

It's more likely that the current push for people to fix their mortgages, is just the banks trying to lock in 5/10 years fixes before rates go negative.

Once this push slows, they'll need somthing  new to push up prices further. 

They've discussed negative rates for sometime now and whether the news is full of traders assuming a uptick in rates is just part of the fear mongering. It doesn't mean it will happen.

The government do not want to punish the financially responsible, rather erode their debt so they can move further up the ladder. Gaining access to a better area with better networking etc.

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17 hours ago, Flat Bear said:

There is a great need for housing throughout England in particular. It must be remembered this need is likely to grow over the coming years as the population continues to grow quickly.

The only way I can see that house prices will fall nominally is if they become less affordable to the point it is out of reach of the next purchaser.

The base rate doesn’t correlate exactly with what an available mortgage rate you could get could be. At this time there is still excess money in the banking system trying to find very safe investment even at very low returns, so it also depends as to how much extra money is available and at what cost.

This is likely to be a protracted event and if as I believe we start to see higher and higher inflation over the coming years interest rates will slowly start to rise. It is possible in a very high inflation environment real house prices fall considerably but nominal prices maybe fall slightly or rise slightly or even stay the same which is a real possibility.

So as the base rate slowly starts to rise, and liquidity slowly starts to dry up mortgage rates offered will begin to get more expensive.

House prices are fairly stable generally and tend not to change dramatically so it could take longer than anyone thinks for prices to fall and if this scenario came about a long denial stage would take place. The auction house with destressed sales will start any possibly larger correction.

I think there is much more inflation already in the system than the BOE think (or admit to). It is a well-known fact on this forum the FED and the BOE will hold the base rate as low as possible for as long as possible. I think that it is possible that the base rate in the UK will still be under 1.5% going into 2023 by this time inflation will have started to have devalued the debt to some extent. I cannot see how they can hold at these low rates going beyond the beginning of 2023 or how any further stimulus is possible so with inflation above 10% which I believe will be the case, that is when we are likely to see some sort of correction in many asset classes, what form it will take exactly is very difficult to predict.

Thr population of  homeowners is going to fall by 250k per year as the baby boomers die and sell up. The birth rate is at its lowest every and below sustainment level, the governmentnow has comple controlof immigration so that sorce of growth should shrink.

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3 minutes ago, Peter Hun said:

Thr population of  homeowners is going to fall by 250k per year as the baby boomers die and sell up. The birth rate is at its lowest every and below sustainment level, the governmentnow has comple controlof immigration so that sorce of growth should shrink.

The age of boomers is between 57 and 75, so many still have a few decades to go.

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It kind of misses the point... the shifts in swap rates, etc., "could soon bring an end to an interbank price war for business in the 1.6 trillion-pound ($2.2 trillion) mortgage market." - that is where you see the impact! 

https://www.bloomberg.com/news/articles/2021-10-22/u-k-rate-surge-pressures-banks-to-start-raising-mortgage-prices

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Yes, even a rise from 0.1% to 1% will lower house prices or stop them going up at least. A rise to 1% is hugely significant. And a stop to QE expansion (from end of the year)

I have also never seen a BOE chief economist like the current one. He is an inflation hawk who is more in it for the average dude than the investor. Seen some good interviews with him. Price stability is their main focus now. Covid is over economically and the banking crash is over. We will be back to 0.75% in no time at all and much of the gains over the last 12 months will be reversed.

Things are about to change. Will it cause a rapid crash? Not unless inflation really gets out of control. But it will cause real term falls over the next few years.

If inflation gets out of control the BOE will act and then house prices will collapse. We are talking huge falls. I see it as unlikely though as globalisation is deflationary.

The current situation is the top of the mountain. The money is about to get much more expensive to borrow and lend. Monetary policy is tightening worldwide (already seen in many places) whilst Fiscal policy is already tightening. 

 

Edited by henry the king
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38 minutes ago, Social Justice League said:

IR's should really be at 6%+ today.  Most mortgage holders can't afford either much higher payments or much higher costs for everything else, so it's going to be huge pain either way.........rampant inflation or IR's at a sensible level.

Even with IR of 1.5%, the housing market cannot sustain it. And we will have IR of 1% within 12 months probably. So yeh, something is going to give.

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I think an interest rate rise to 1% won't affect existing homeowners too much as most of them will be on fixed rate mortgages. However it will slow the market down on the bottom end and make it more difficult for first time buyers and potentially even those looking to scale up as a higher deposit will be required.

Will it lower prices? I don't think so considering the supply of housing is still too low with demand very high. I think at most it will stagnate prices but then again I don't have a crystal ball.

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On 22/10/2021 at 17:37, TheResponsibleHouseBuyer said:

Therefore any increase in the base rate is likely to not make a major impact i think........ so if like me you arent a homeowner we're all doomed!

What's anyone here thinking?

In fact, the Bank of England themselves believe that an increase in interest rates will rinse out the housing market:

Quote

Our results indicate that if the risk-free rate moves by just 1%, this can result in real house prices ultimately moving by roughly 18% in the opposite direction in the long-run.

So here’s hoping eh?

Full BoE piece: https://bankunderground.co.uk/2020/01/13/whats-been-driving-long-run-house-price-growth-in-the-uk/

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5 hours ago, Social Justice League said:

IR's should really be at 6%+ today.  Most mortgage holders can't afford either much higher payments or much higher costs for everything else, so it's going to be huge pain either way.........rampant inflation or IR's at a sensible level.

 

Why 6%?

Why do people have this idea of "normal" interest rates?

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12 hours ago, Sprrite said:

I think an interest rate rise to 1% won't affect existing homeowners too much as most of them will be on fixed rate mortgages. However it will slow the market down on the bottom end and make it more difficult for first time buyers and potentially even those looking to scale up as a higher deposit will be required.

Will it lower prices? I don't think so considering the supply of housing is still too low with demand very high. I think at most it will stagnate prices but then again I don't have a crystal ball.

The point is that fixes end all the time. I’d say most people take the cheaper 2 year fix so a significant proportion will be looking for a new rate every month. 

A 1% rise will have a huge impact on prices - such is the mess our UK property market is in. 

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