As interest rates rise, it may have a significant impact on homebuyers' purchasing power and sellers' ability to sell their properties. Recently, the demand for and supply of real estate in London have both reached all-time highs. Yet with mortgage rates on the rise, London's property market's future is uncertain for many.
The base interest rate in England will be going up as a result of a decision made by the Bank of England. This is the first increase in rates in almost a decade. Higher interest rates entail higher mortgage payments, which may put downward pressure on housing values, therefore investors and homeowners are concerned.
Raising interest rates has the potential to dampen activity in the real estate market. Borrowing money becomes more expensive when interest rates rise, which may make securing a mortgage more challenging. Property prices may fall if fewer individuals are interested in making purchases due to this. This impact may be magnified if the interest rate increase is substantial.
As interest rates rise, homeowners may find it more challenging to meet their mortgage obligations. Paying more each month might be a financial burden for those who have mortgages with variable interest rates. As a result, more mortgages may go unpaid and homeowners' properties may be repossessed and placed up for sale.
But, it must be borne in mind that higher interest rates might, in fact, benefit the housing market. For instance, it may reduce the likelihood of speculative investments, which in turn would assist maintain price stability over the long term. Although higher borrowing rates might put off some purchasers, they could entice others who have been patiently waiting for the market to stabilise to make a purchase.
By examining the history of Bank of England interest rates between the 1970s and 2022, it is clear that there have been multiple periods of increases. As an example, between 1978 and 1981, the Bank of England hiked interest rates from 6.75% to 15% as the government fought hard to curb increasing inflation. The average price of a house in London continued to climb over that time frame, as recorded by the Land Registry. Around the end of the 1980s, interest rates started to climb again, in part because of rising home prices. From a high of 17% in 1979, interest rates dropped to 9% in 1982, only to climb back up to 14.88% by October 1989. London home prices also did not drastically drop during this time, instead increasing from £67,000 to £76,000 over the course of the same three years.
Worth noting also is the fact that interest rates in England have been at or near record low levels for the last 12 years, especially when compared to the decades prior. It is estimated that the 30-year mean interest rate is 9.85% if we look at the years 1975-2007 as our data set. The London real estate market has shown to be rather resilient in the face of an increasing interest rate environment, despite the fact that previous success is no guarantee of future outcomes.
Sources:
https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp.
https://landregistry.data.gov.uk/
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Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Maiden Capital. The information provided is meant as a general guide only and should not be construed as investment advice. You should always consult your financial, legal and tax advisers regarding private equity and real estate investments