How rising inflation will make buying a house much harder
Martin Roberts discusses getting on the property ladder
We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info
House prices have risen by record rates since the market reopening following the first UK-wide lockdown, having soared 11 percent in the past 12 months, according to Nationwide, and are now 13 percent higher than when the pandemic started. The Bank of England’s record-low borrowing rate of 0.1 percent has helped prospective homeowners get on the property ladder – but this rock bottom rate is expected to rise in the coming months, with more hikes expected in 2022.
One of the ways the Bank of England tries to control inflation is by increasing the cost of borrowing – and with inflation set to rise further, the bank may need to act soon.
When the Bank of England increases the base rate, the interest rate on credit cards, loans and mortgages usually increases by a similar amount.
Experts have warned that the rise in inflation, while likely not a long-term fixture, first-time buyers could be the ones feeling the pinch if there is a change in borrowing rates.
Dale Anderson, Managing Director of Fabrik Invest, told Express.co.uk: “The Bank of England thinks inflation, presently two percent, will rise to four percent this year before dropping back down.
READ MORE: Boris Johnson pledges £58M to build new homes – EXPERT insight
“This presents a challenge for first-time buyers. However, with borrowing rates still at a record low, there still does seem to be high demand from both first-time buyers and buy-to-let investors at present, despite the spike in prices.
“We believe that at some point things will stabilise and prices will cool down, but when that will happen is rather hard to predict, although things do seem to be getting back to some normality now, following the pandemic.”
Mr Anderson revealed the rising demand has put a strain on the cost of building new homes, which is in turn raising the cost of homes.
He told Express.co.uk: “With inflation on the rise and the cost of building materials going up, there is a definite impact on the cost of building new homes, which is driving the prices up on the properties.
“Inflation has returned to stalk the UK economy; new data reveals near-record rises in both factory costs and property prices recently.
“Average house prices surged by 2.1 percent in August, the second-largest monthly jump in 15 years, with the average cost of a UK home now £248,857.”
“As rising demand chases constrained supply, companies often have no choice but to pass on the increases to clients and customers.”
Continued rapid house price growth will make affordability worse if the borrowing rate rises as much as two to three percent.
Property for sale: Common red flags to look out for when buying [EXPLAINER]
Britons can buy house in Lake District for less than a London garage [INSIGHT]
House prices fear as mortgage rates rise – ‘winter of discontent’ [REPORT]
The boom in house prices has led to the value of homes being thrown out of kilter with wages – more so than any time in the last 14 years.
For example, in the last three months of 2008, the average home would cost 6.3 times average earnings.
Today, that has risen to 7.4 the average earning.
This would normally limit house prices, but record-low mortgage rates have in real terms made homes cheaper to buy.
But if the Bank of England rate rises significantly, buying power could all but disappear, making homes unaffordable for some lower-end buyers who are able to purchase in present conditions.
Existing homeowners could also find their portages suddenly unaffordable, with a bank rate rise of two percent potentially triggering a higher number of households struggling to repay their mortgage to the bank, particularly those on variable rate portages.
When considered alongside the energy crisis, this could put pressure on affordability and, in turn, increase the likelihood of forced sellers.
Source: Read Full Article