How Will Rising Inflation Affect the Future of House Buying?

From soaring energy prices to everyday consumer goods, you can’t escape inflation at the moment and that’s never more true than in the housing market.

Rising house prices

Anxieties peaked recently when UK house-buying demand fell at the fastest pace since the 2020 lockdown and sales slumped for a sixth successive month.

Clearly, rising inflation tends to bring higher interest rates – the UK is now at 3% and rising – which can slow house price growth.

In this piece, we examine why housing mortgage rates have risen and how prospective buyers can overcome this.

Why are mortgage rates on the rise?

The government’s mini-budget sent shockwaves through the market in September with interest rates tripling and housing groups reporting a drop-off in sales activities. Some of the country’s major lenders, including Barclays, Natwest, Halifax and Virgin Money pulled deals from the table before restoring them back to the market with higher prices.
This market uncertainty and the volatility of the pound led to increased interest rates especially when compounded by other factors such as increased borrowing from the pandemic, the supply chain crisis and Russia’s war in Ukraine.

Will inflation increase or decrease house prices?

This trend of higher home-loan costs and lower housing prices is likely to continue well into next year, despite the calming of financial markets since Rishi Sunak’s accession to prime minister.

Naturally, a sharp rise in mortgage borrowing costs has a major impact on house price affordability. High prices which once seemed affordable will soon be so much less when the cost of borrowing increases. This contributes to a slowing in housing market growth and the value of some houses which become overly inflated will be reduced.

mortgage rates

How can you overcome this?

Current inflation poses problems to both buyers and sellers. Sellers should focus on realistic prices to complete sales while buyers may need to be more flexible with their buying strategies. Often with such market forces, buyers may need to compromise on property type, price point or location in order to get a suitable deal across the line.

Credit crunching

One thing borrowers can also do is to make sure their credit score and finances are in as good as state as possible. Tzana Webster is Director of Property Sales at Watermans and a key figure in property valuation Edinburgh.

She advises: “When the Bank of England and other lenders change their interest rates to the mortgage products they are offering or even for simple borrowing, this is because they want to borrow their money out to people who would be considered “low-risk” borrowers.”

“This means that those people who have high levels of debt or who may have missed monthly payments on their credit cards or phone bills aren’t going to be seen as good candidates for lending money to and these people who have missed payments or have high debt levels will find their choice for low-interest rate products to be limited. This is because the banks will think they will be risky to afford the monthly repayments on the new borrowing.”

Firstly, you should speak with a financial advisor to find out exactly what you can afford. Have a long, hard look at your affordability and your debt, and really dissect your monthly payments and budget. Check to see if there’s anything that you can get down with payments to your credit cards or cancelling any subscriptions that aren’t needed so that you can save more and make yourself a more desirable and low-risk prospect to lenders.

Broaden your Horizons

One hugely important thing is to live within your means. If your dream home in your dream area is just that little bit out of reach, don’t despair! You may just need to broaden your horizon to consider other property types, sizes, styles and areas to get you into your new and improved dream home.

Have a re-think to your priorities and your criteria. What about looking at a property that maybe needs a bit of “TLC” with a fresh coat of paint or a revamp to the kitchen and bathroom? Or what about properties that maybe don’t have the exact number of bedrooms that you ideally want, but the home has scope for building an extension?

What about considering different areas? If you aren’t finding the right size of the property you want in your dream area, it may be time that you look at areas adjacent to your dream location or even just outside to find a more affordable option?

You may be pleasantly surprised that your change of criteria could very well get you the new home of your dreams.

What’s Next?

Despite markets calming, it could be a while until interest rates drop to previous levels. As interest rates increase, so do people’s mortgage repayments which means mortgage payments are now the second biggest price rise of the year behind people’s energy bills.

The cost-of-living crisis is real and buyers need to factor this in when considering their options in the property market.