The Bank of England raised interest rates to 1.75% on 4th August 2022, which was the fifth interest rate rise since the start of 2022.

Inflation is at its highest level since the 1980s and is set to rise even further with the prospect of it running out of control. We can surely expect further rises in interest rates for the foreseeable future as monetary policy, and the control of inflation appears to be the number one priority of the Bank of England. But what will be the impact of this on UK property prices?

In this issue, we look in the rear-view mirror and examine the relationship between interest rates and property prices in the past. Furthermore, we look at what’s happening right now and assess the impacts that recent interest rate rises are having on asking prices for property newly for sale.

Interest Rates and House Prices – a Recent History

If you read almost any property industry press recently, there is much talk of property prices falling, and some commentators and prominent economists suggest that this is happening as a direct result of interest rate rises. It almost seems like people want to dust down our old adversaries, doom & gloom, and take them out of the closet once again.

We looked at every single Bank of England rate change since the year 2000 – there are 42 of them in total. As a side note, the economists amongst you will remember that the Bank of England has independently set interest rates since Gordon Brown granted this power to them in 1997.

Back to the story – we’ve then looked at the correlation between the rate change and average property price sales, for a period of up to a year after the change.

There appears to be no significant correlation between rate changes (whether upwards or downwards) and property prices in this time period.

In fact, for one to five months post a rate change, the opposite effect occurs – i.e. rises in interest rates also see rises in property sale values and vice versa. It’s only from month six that prices start to fall.

However, the big news is that there is not even a weak correlation, let alone a strong one. We, therefore, ended up concluding that interest rate rises do not affect house prices in the 12 months post the rise occurring.

If we stand back and think about this for a minute, because I appreciate it might be big news, it is not actually that surprising.

Interest rates definitely affect the affordability of mortgages, to a certain extent. In fact, things like inflation, the cost of living, employment rates and stability, wage inflation, consumer confidence, and (our best friends) housing supply and demand, all affect property prices much more.

Interest Rates and Asking Prices

Before we get into the detail of this, we look at asking prices because they almost immediately change after and during an event. Where actual prices paid for property can change this is more likely to be six months after an event.

Anyway, asking property prices are falling right now. The following chart displays average initial instruction prices for sale outside of London for the whole of 2022:

We can see by looking at August 2022’s position that prices have fallen by 4.5% in the last month and 5.5% in the last two months. The latter, by the way, knocks £21,000 off the average non-London UK property price.

The following chart displays the same information for London:

Here, the fall is much starker. In the last two months, London asking prices had fallen by 9.7%, which equates to a massive £82,000 off the average London property price.

Whilst this looks like bad news on the surface of it, let’s put our old adversaries doom & gloom back in the cupboard for the time being. These price falls over the last two months have been more than masked by prior performance, and arguably property prices were probably overvalued in any case.

In the last year to August 2022, despite the recent two months of falls, non-London prices have risen by 9.5% (or £31k) whereas London prices have risen by 12.2%, or £83k. So, they have a way to fall yet before we get anything like negative growth year on year.

Let’s get back to the original question. If interest rates rise, does this affect the asking prices of properties?

Once again, however, history tells us that there is no link – interest rate rises do not affect house prices in the twelve months post the rise occurring.

Source: TwentyCi