The U.K. housing market had a strong 2021 with mortgage rates at record low levels.

A 5-year fixed rate mortgage could be had for less than 1.5%. The market continued strongly into 2022.

Over the last 3 months however mortgage rates have moved dramatically higher.

A 5-year fixed rate is now circa 4% and quite possibly with additional rate rises, could reach 6% plus.

This will stop the housing market in its tracks.

A £100,000 interest only loan is no longer £125 a month, it’s £333.

A £300,000 capital and Interest mortgage is now around £1,650 – £1,800 pm 

Now 4% on a mortgage is not high by historic standards but it’s high relative to the recent period where house prices have risen.

If we assume that the cost of the borrowing will have an effect on the price someone is willing to pay (because it’s about affordability) then higher costs should mean lower prices.

This is in essence the same calculation being seen in equity markets. Higher interest rates are reducing the values investors are willing to pay for stocks.

Against this negative are several positives.

  1. There are more potential buyers in the U.K. than houses available (demographic supply constricted)
  2. The Government has just cut stamp duty and announced assistance for first time buyers
  3. People are not moving as much because of far higher stamp duty costs so there’s a low level of supply to market

What we will see for a time probably is a stand-off between sellers who still want the price they would have got 3 months ago. And the buyers who are saying, look at what’s happened and what’s coming, we want a discount. 

Prices will break down with motivated sellers needing to take lower offers over the next 6 months is our view.

Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog, and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.