Should you hold off on buying property during the cost of living crisis?

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There is no denying 2022’s property market has surprised UK citizens. With the Bank of England Base Rate increasing by 1.5% since December 2022, it’s natural that aspiring homebuyers are having doubts about whether this is a good time to buy? 

Buying a new property always comes with rise and these have been exaggerated due to the cost of living, interest rates and the UK economic climate following Covid. Those saving for a deposit are finding it increasingly hard to stash money away at the end of the month and build a substantial deposit.

Many aspiring homeowners and investors are now questioning whether purchasing property is a good idea. Our rates of inflation have reached a 40-year high (which saw the American Stock Market drop by 5% yesterday) and it’s difficult to predict what will happen to the property market in the foreseeable future. 

On the other hand, interest rates are still at historically low levels. 

How will rising interest rates influence UK house buyers?

For every half-percent rise in interest rates, the average homebuyer loses around 5% of buying power. This means that a buyer who was originally intending to purchase a property for £200,000 could potentially only afford to pay £190,000 causing many to qualify for a lower loan amount than they might have originally estimated or hoped.

Brokers on the Mortgage Propeller platform are spending more time working through their clients' affordability capabilities as soaring prices force central banks to raise interest rates, exacerbating pressure on homeowners. 

Those already in a home with a mortgage are not spared either. While homeowners on fixed rate mortgages have been spared from interest rate rises currently those on Trackers and Standard Variable Rates are seeing monthly mortgage payments increase.

On top of reducing the affordability of the average UK homebuyer, rising interest rates can also cause lenders to tighten their borrowing criteria in order to minimise risk. This makes it more likely that individuals with a below-average credit score, or those with a poor financial past, will be denied a mortgage. 

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This causes a problematic situation for those looking to get onto the property ladder, as they have to adjust and cut corners in order to ensure they can afford the property they want. 

As much as buying is becoming more of a challenge, it seems like the UK property market shows no signs of slowing down, Halifax reported house prices increase 0.4% in August 2022 recording another all time high. 

How much will interest rates increase?

The Bank of England Monetary Policy Committee (MPC) meet roughly every six weeks to decide whether interest rates should increase, decrease, or remain the same. The ‘BOE’ Base rate sets the baseline for all lenders across the country and when it increases lenders must increase their interest rates accordingly.

The reason for this is simple: when inflation is on the rise, lenders require a higher rate of return on their investment in order to maintain the same purchasing power. As a result, interest rates go up, making borrowing money more expensive. When inflation is high, interest rates get higher as well; when inflation is low, interest rates follow the same pattern and eventually decrease.

Currently, the inflation rate has reached a 40-year high, sitting at 10.1% as of July 2022. This drives interest rates upwards as the BOE attempts to get inflation under control. Rising interest rates is the Bank of England’s MPC’s best bet at trying to tackle inflation. As spending declines demand and spending fall and so should the price of everyday goods. 

It’s difficult to predict how inflation will behave. Geo-Political events in Ukraine do not help but economists are hopeful it won’t peak as high as previously forecast following the government’s recent announcement on the energy bill cap. However, the Bank of England stated it expects inflation to reach 13% in 2023. 

Will house prices crash?

The UK housing market has undoubtedly been booming in recent years. Low interest rates, the stamp duty holiday, a supply shortage and increasing rents have driven prices upwards for a decade, making the current climate even more daunting for first time buyers. 

There was recent media speculation that the UK property market was heading for a crash in 2022 or the not too distant future but recent house price data suggests otherwise. 

A GOV.UK report over the summer showed that the average house price in the UK had increased by 12.8% - almost £32,000 versus the same time last year. A crash resembling that of the credit crunch would seem unlikely but a slowdown in the growth of property prices looks certain with certain cities and towns, with high costs of living, more likely to see prices decrease.


So, should I buy a house now or wait?

Well, it depends on your own personal circumstances. An investor may be more impacted by a fall in house prices than a first time buyer who’s mortgage repayments are less than rent and payments with the upside they get to own their own home.

Speaking to a mortgage broker to review your affordability is an important start. Lenders will have their own affordability criteria but a broker on the Mortgage Propeller platform can review this for you.  The strong possibility interest rates will continue to rise over the next two years will impact affordability greatly so best to speak to an expert for advice.. 

But it’s not all doom and gloom.  If your circumstances and affordability enable you to buy you may find you have less competition from other potential buyers.  Also, some sellers will be affected by the cost of living and want to downsize quickly - a lower price may be available for a buyer with their Decision In Principle to hand.

It’s an ill-wind that doesn’t blow some good, so if you are seeking your dream home unexpected opportunities will hopefully present for you.

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