Higher interest rates will reduce property prices – report

Rate increases could also impact rental prices, says company

Higher interest rates will reduce property prices – report

Higher interest rates will reduce demand in the property market and lower house prices, an analysis by KIS Finance has found.

The impact of the recent rate increases on an average buyer is significant, KIS Finance said. A customer who purchased property in October 2021 for £220,000 and needed a mortgage of £198,000 with a five-year fixed rate of 2.5% would have to pay £745.05 monthly over a 32-year term. However, a customer purchasing the same property with the same terms at the current rate of 6.15% would have to make monthly payments of £1,185.

As such, the high cost of borrowing will likely keep the number of buyers down and cause the housing market to contract. House prices are likewise expected to fall, with customer demand declining due to the increased cost of obtaining a mortgage.

“As people review the amount they can borrow, we are likely to see downward pressure on house prices that hasn’t been seen since the 2008 and the credit crunch,” the report said, citing predictions that prices could fall “by as much as 5% in 2023, with a further 5% fall in 2024.”

“Those who have taken out high loan to value mortgages over recent years, may face the potential risk of negative equity in their properties, if prices were to fall sharply,” the report added.

KIS Finance also examined the impact of higher interest rates on the buy-to-let market, with current pressures pointing to further rent increases.

“With lenders increasing the stress test multiples, the resulting impact on rents will hit the housing market at the worst time, as general costs of living soar,” the report said.

According to KIS Finance, a basic rate taxpayer who purchased a buy-to-let property for £152,000 in October 2021 and was approved for a mortgage of £114,000 at a five-year fixed rate of 2.19% would need a minimum monthly rental income of £513 to cover the loan, considering that the rental income was stress tested at 4.5%. Purchasing the same property today at the current 5.39% rate would require a rental income of £968 per month, with the lender having increased its stress test calculator to 8.49%.

“If tenants can’t afford to pay the increased rents, then there will be a drop off in people renting and a decrease in the demand from landlords to buy properties to rent out,” the report said. “This in turn will lead to falling property prices.”

The equity market has also come under pressure from rising interest rates, according to KIS Finance. Homeowners have turned to equity release for extra income amid the cost-of-living crisis, while those with interest only mortgages have used it to raise funds to repay their loan. Today’s high interest rates have made this “a less attractive option,” however.

Additionally, while interest rates have been steadily falling within the short-term lending market, experts in the sector predict that bridging rates may also start to rise, with lenders feeling the squeeze caused by the Bank of England’s consecutive rate hikes over the last year.

“Some lenders have started to increase their rates for the first time in 12 years, and we are seeing increases of 0.1% to 0.2% per month, but more noticeably the fear of reduced property values has seen the maximum loan to values drop from 75% to 70%,” the report said.

Holly Andrews, MD at KIS Finance, commented: “With interest rates likely to continue to climb over the coming months, housing costs are set to account for an increasing proportion of household incomes. Whether it is increasing mortgage payments or rising rents, disposable income will be hard hit by these rising costs. Alongside the increasing costs of other essentials, such as energy and food, we are likely to see a significant reduction in non-essential spending. As people cut back on eating out, gym memberships and non-essential shopping, the overall economy will start to feel the squeeze as the focus for the coming months for many will be economic survival.”