One of the most common news stories to be found these days is the impact of higher interest rates on the housing market. It matters, especially now that we are days away from the next meeting of the Bank of England’s Monetary Policy Committee and another possible hike to the standard base interest rate. If the rate is indeed increased, it will be the eleventh consecutive meeting of the MPC to result in an increase to the base rate. It will raise the base rate above the current 4.0% and reach a level not seen by a large number of hopeful homebuyers and it will cause financial strain to many homeowners.

The interest rate is one of the most important determinants of the UK housing market's performance. A change in interest rates can have a significant impact on the property market, affecting house prices, demand for mortgages, and the overall health of the economy. Higher interest rates make it more expensive for people to borrow money, which can reduce demand for property purchases and lead to a slowdown in the housing market. Since the housing market helps to determine property values, a cooling of the market could cause many newer homeowners to go into negative equity.

One of the most significant impacts of higher interest rates on the housing market is the effect on mortgage affordability. When interest rates rise, the cost of borrowing increases. This means borrowers will need to pay more in interest charges each month which leads to higher repayments. This can make it more difficult for people to afford their monthly mortgage repayments, especially if they have variable rate mortgages. As a result, higher interest rates can reduce demand for new mortgages, which can lead to a slowdown in the housing market.

Another impact of higher interest rates on the housing market is the effect it can have on house prices. When interest rates rise, it can lead to a decrease in house prices. This is because the increased cost of borrowing can reduce demand from home buyers, as people may decide to delay buying until interest rates decline. 

A decrease in demand can cause a fall in house prices, which can make it more difficult for people to sell their homes. It can impact even those homeowners wanting to stay put. If a homeowner falls into negative equity due to falling property values, they will be out of reach of a remortgage.

Higher interest rates can also impact the rental market. When interest rates rise, it can lead to an increase in rental prices. This is because the cost of borrowing increases, which can make it more expensive for landlords to buy or remortgage their properties. As a result, landlords may need to increase rental prices to cover their increased costs. This can make it more difficult for renters to afford their monthly rent payments, which can lead to a decrease in demand for rental properties.

Higher interest rates can have a significant impact on the overall health of the economy. When interest rates rise, it can lead to a decrease in consumer spending. This is because people may need to pay more in interest charges each month, which could reduce their disposable income. A decrease in consumer spending can lead to a slowdown in the economy, which could have a knock-on effect on the housing market. A slowdown in the economy can lead to a decrease in demand for property purchases, which could lead to a decrease in house prices. 

Inflation has for over a year now been making it difficult for home buyers to save for a deposit. Straining to save for a deposit and to fund a move to relocate to a new home, and then struggling to afford the repayments has been a scenario fewer home buyers are willing to enter into and risk their financial future. Since inflation and other current factors impacting the economy are seen as a temporary condition, many will be waiting for a more favorable economy to develop before jumping onto the property ladder.

The impact of higher interest rates on the UK housing market is significant. Higher interest rates can lead to a decrease in mortgage affordability, a decrease in demand for property purchases, a decrease in house prices, an increase in rental prices, a drop in property values, and a slowdown in the economy. It is important for policymakers to consider the impact of interest rates on the housing market when making decisions about monetary policy. Homebuyers, homeowners, landlords, and renters should be aware of the potential impact of interest rate changes on their finances and the housing market in general.

The next meeting of the MPC is 23 March. Experts are predicting a 0.25% to a 0.50% rate hike. There will not be a meeting held in April, and to keep inflation under control, it is likely the MPC will want to put into a place another rate increase that will have a lasting effect until the next scheduled meeting for after March which will be 11 May.