Interest rate hikes will dampen housing market, Rics warns

New interest rate hikes are likely to ‘dampen’ positive trends in the UK housing market, according to a new closely monitored study.

Rising interest rates, which are expected to rise further to around 5.5 percent by the end of the year, are driving up rates on new fixed-term mortgages and creating hesitation in the market.

Expectations of further interest rate hikes could put renewed downward pressure on the market in the coming months.

The Bank of England’s monetary policy committee has raised interest rates at each of its last 12 meetings, from 0.1 percent to 4.5 percent.

Those looking for a two-year, fixed-rate mortgage but have only saved a 5 percent down payment will have to pay an average mortgage rate of 6.01 percent. Many are rushing to secure deals before rates rise again.

Figures compiled by real estate website Rightmove showed that home loan rates rose by an average of 0.39 percent over the past week.

In his latest survey, Rics said new inquiries from homebuyers and agreed sales metrics were the “least negative” in a year last month.

New instructions were also on the rise, with the indicator moving into positive territory for the first time since early 2022.

But Tarrant Parsons, senior economist at Rics, said higher interest rates could quickly reverse these positive effects.

He said: “The latest feedback from the RICS UK Residential Survey points to a modest recovery in sales market activity in May, with generally less negativity compared to the end of 2022.

However, it appears that storm clouds have gathered, with stubbornly high inflation in the UK likely to undermine the recent improvement in activity by prompting the Bank of England to take further action through rate hikes, leading to higher mortgage rates and ultimately a reduction in affordability and buyer demand. .

“The banking sector seems to expect this, as many banks and building societies are already introducing products with higher interest rates.”

Prices: Property prices are falling, but the rate of decline has slowed, Rics said

Variations: Scotland and Northern Ireland have seen property prices rise in recent weeks

Forecasts: A chart from Rics with forecasts of UK property prices for the next 12 months

National house prices continued to fall last month, “although the downward pressure is easing,” Rics said.

It added: ‘Within this, the disaggregated data now shows some notable variations in house price trends in different parts of the UK. In London, for example, the latest net balance of -3 percent indicates a mostly stable picture (compared to the values ​​of -42 percent and -11 percent in March and April).

‘In addition, respondents in Scotland and Northern Ireland saw an increase in house prices. By contrast, prices continue to fall in most regions of England, with net balances in the East Midlands (-68%) and the South East (-48%) deepest in negative territory.

It added: “Looking ahead, the range of national house price expectations (for the next 12 months) is now in broadly neutral territory, with a net balance of only -3 percent.”

Rics said the agreed sales indicator for May produced a net balance of -7 percent, noticeably less dismal than the -29 percent and -18 percent numbers in March and April respectively.

Tariffs and pending reforms affect the rental sector

Decline: In most parts of the UK, prospective landlords’ instructions are declining

Rising interest rates are also hitting the rental sector, Rics said today.

Threatening reforms proposed in the government’s Tenant Reform Act mean that landlords are increasingly deciding to leave the industry and sell properties, further limiting rental supply, it added.

In the rental market, a total net balance of +44 percent of contributors saw an increase in tenant demand in May.

On the same basis, new landlord instructions would have fallen by a net balance of -23 percent.

Rics said: ‘Looking further at the supply in the rental market, almost two-thirds of survey participants report seeing an increase in the number of buy-to-let landlords looking to sell their properties.

In addition, a similar percentage report interest from new UK-based buy-to-let investors has declined over the past six months, while 30 percent also report a decline in interest from foreign buy-to-let investors . let investors.

As all of this adds to the ongoing mismatch between rising demand and falling supply, rents are expected to rise by a net balance of +53 percent in the short term from respondents.

‘In addition, rents are now expected to rise by an average of just under 6 percent per year over the course of the next five years.’