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British house prices to continue rising even as BoE hikes rates

© Reuters. FILE PHOTO: An estate agent’s board is displayed outside a house on a terraced street in Blackburn, Britain, January 17, 2022. Picture taken January 17, 2022. REUTERS/Phil Noble/

By Jonathan Cable

LONDON (Reuters) – The outlook for Britain’s housing market has barely changed in the last three months despite the Bank of England embarking on a cycle of interest rate hikes, a Reuters poll found, although the rise in home prices will lag overall inflation this year.

After slashing the Bank Rate to a record low 0.10% as the coronavirus pandemic unfolded, the central bank has recently reversed course to lift it to 0.50%. It is expected to add another 50 basis points by end-June, increasing borrowing costs for home buyers needing a mortgage. [ECILT/GB]

In line with the global trend, UK inflation is soaring with a rise in prices of 5.5% last month the most in nearly 30 years, hitting borrowers’ disposable income. Inflation is expected to average 5.2% this year.

“Rising interest rates and cost of living will constrain affordability, limiting house price growth,” said Edward Hampson at estate agency Savills (LON:SVS).

But with the Bank Rate only expected to reach a still-historically low 1.00% by mid-year, coupled with a lack of supply, house prices were still expected to rise 4.0% this year and 3.0% next, the Feb. 8-24 poll of 18 property market experts found. Those were broadly unchanged from December predictions.

“If interest rates rise even to the heady levels of 1.00% this year to combat inflation, that’s still cheap money and will continue to fuel demand,” said independent property analyst Russell Quirk.

When asked how high the Bank Rate would have to go this year to significantly slow housing market activity the median was 1.50% – a level only four of 50 economists forecast it reaching in a separate Reuters poll.[ECILT/GB]

“Interest rate rises during the mortgage term are already priced in to the fixed-term mortgage rates that affect most borrowers, so only rises that are noticeably in excess of market expectations will have much impact,” said Mike Scott at online estate agency Yopa.

Asked about the value of national house prices on a scale of 1 to 10 from extremely cheap to extremely expensive, the median response was 7, matching December’s estimate. In the capital it was an unchanged 8.

London has always been a magnet for foreign investors but the pandemic, alongside Britain’s departure from the European Union, quelled some demand.

Alongside that, office-based employees who have spent nearly two years working from home – and are likely to continue to do so even if only for part of the week – have sought to escape the city for larger homes further away from the centre.

House prices in the capital were forecast to rise 2.4% this year, unchanged from December, and 2.3% in 2023 – a downgrade from the 3.0% given in the last poll.

“With hybrid work patterns set to be a permanent fixture, we suspect many households have yet to adjust their housing situation to best suit their new routine,” said Andrew Wishart at consultancy Capital Economics.

“As a result, we suspect that the adjustment to remote working has further to run, meaning that the underperformance of London house prices will be sustained.”

(For other stories from the Reuters quarterly housing market polls:)

British house prices to continue rising even as BoE hikes rates

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