Rising interest rates destabilise UK housing market


Property prices fell at the fastest rate in over a decade, as mortgage affordability worsens

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Image by Bank of England

By Lena Mazel

Experts have predicted a ‘cooling’ housing market in 2023, with high inflation and rising mortgage rates dampening the unprecedented demand seen last year. Beyond mortgage rates and inflation, cost of living concerns, market instability, and financial uncertainty after August’s mini-budget could also cause buyers to hold off. At the same time, rental prices are predicted to rise further in 2023, including in York. As some University of York students have already seen, high demand can also cause long wait times and difficulty finding rented accommodation.

In late 2022, the home buying market already showed a notable decrease in house prices and an increase in mortgage rates. This caused economists to predict further price falls in 2023. According to a Guardian report from late December, house prices dropped by 2.3 percent between October and November 2022, the biggest drop since October 2008. In December, the Bank of England (BoE) raised the base rate to 3.5 percent — the highest rate in 14 years. Economists predict that the BoE will raise interest rates from 3.5 percent to about 4.75 percent in response to inflation. This could reverse some of the significant price gains seen in recent years, with house prices up 12.6 percent in the year to October 2022 and the average property costing £296,000 compared to £231,000 in January 2020.

Rising interest rates have generated fears over a potential housing market crash, however predictions remain modest. Nationwide estimates a potential average fall in housing prices of 5 percent while Lloyds Bank forecasts a fall of 8 percent. While these predictions do not account for regional variations, nor the sale of more unique properties which are harder to accurately value, it offers an insight into the year ahead.

In November, Ben Hudson of York-based Hudson and Moody noted a “slower, more cautious market following the last two years of mayhem. However, back to normality, and by traditional standards in the run up to Christmas, no real difference to normal.”

High interest rates have meant more first-time buyers are waiting to buy, keeping them in the rental market and causing rental prices to increase, making it even more difficult to find rented accommodation. Average UK rental prices increased by 4.2 percent in 2022, according to a report from the Office of National Statistics. England’s private rental rates increased by 4.1 percent, while Yorkshire average rates increased by about 4.2 percent.

Rentals in the Yorkshire region followed the overall pattern of high demand. In the November UK Residential Market Survey report, Alex McNeil of Bramleys observed “Hardly any vacant stock and low level of churn,” and Simon Kayman of Property Services In Yorkshire predicted that “Lettings will remain strong as people can’t afford their homes. The problem is some landlords will get greedy and then rents may not get paid if a tenant’s situation changes.” In December, Ben Hudson commented, “The market continues to be busy, but supply issues are starting to ease as more short term lets return to the market.”

In some cities, the proliferation of short-term holiday rentals can impact housing supply. York has recently been discussing adding restrictions to short term holiday accommodation like Airbnb. Amidst a near-quadrupling of holiday lets in the past four years, the City of York Council is considering requiring planning permission for owners to convert homes to holiday lets. But while York Labour’s housing spokesman, Cllr Michael Pavlovic suggested that short-term holiday lets create “a reduction in the amount of ordinary rental properties available for York residents,” the council report found that at just 2.18 percent of York’s housing stock, it was difficult to provide a clear link between holiday lets and increased rental prices.

For some students in York, finding rented accommodation can prove incredibly stressful. Alex, a second-year PhD in Physics, says demand for housing made finding rented accommodation difficult this year. She lives in private rented accommodation with two flatmates. “We really struggled to find housing because everywhere we tried to book a viewing would just be taken within a few days of being put on the website,” she says. “I lived with my brother for two months while we were looking for a place and they were both having to work from their family homes which wasn’t ideal.” Alex and her flatmates will continue to rent next year, and their rent has increased from £1,300 to £1,395 pcm split three ways.

The University of York has taken steps to mitigate the impacts of the cost of living crisis, including a cost of living online hub and a £150 household energy grant. In response to housing issues, the university also has a ‘dedicated in-house housing specialist,’ Stephen Cameron, based in the Student Hub and contactable via self-referral form.