What impact is rate hiking uncertainty having on buyers?

UK households believe the cost of borrowing will still be climbing next year, with one in six worried about the impact of the Bank of England’s (BoE) rate rises, according to the results of our latest survey of buyers.

Higher interest rates

Close to half (45%) of respondents to Knight Frank’s UK Summer Residential Property Sentiment Survey expect rates to continue rising into 2024.

Of these, the largest proportion (27%) believe the bank rate will peak by the end of the first quarter of next year.

Asked ‘how do you feel about the increase in the cost of mortgage repayments?’ 60% of survey respondents stated it had caused concerned (see chart). Close to a quarter (23%) said they were ‘extremely concerned’.

Housing market impact

Following 13 consecutive rate rises since December 2021 the bank rate stands at 5%. This has fed into increased borrowing costs, with the average two-year fixed mortgage now more expensive than at the time of the mini-Budget last year, according to Moneyfacts.

Buyers are finding it difficult to plan without surety about how high interest rates will climb and this is causing hesitation. RICS data covering June shows higher borrowing rates is weighing on sentiment, with buyer numbers, agreed sales and price expectations all falling month on month.

Asked how high they think the bank rate will go, 44% believe rates will peak above 5.5%.

The BoE meets again on the 3 August with the latest strong pay data and a resilient GDP performance adding to pressure to keep raising the bank rate despite a larger than expected monthly fall in headline inflation from 8.7% to 7.9% in June.

While the high cost of borrowing is acting as a drag on homeowners with a mortgage - a million households facing an increase in monthly payments of £500 by Q4 2026 and our survey found 17% of respondents had seen their spending power fall by more than 10% - more homes in England and Wales are owned outright, according to Census data.

House price forecast

It has, as we’ve previously explored, placed those with high levels of equity and cash buyers in a strong position. It is also why house price declines have been gradual, with the average price in the Nationwide House Price Index down 4.1% in June from last August’s peak.

While a third (33%) of those surveyed said the increase in borrowing costs had affected their spending power, 41% replied that it hadn’t as they owned their property outright or were cash buyers.

This division, along with strong wage growth, high levels of employment, forbearance from lenders and the availability of longer mortgage rates, is why we forecast prices will fall 10% over this year and next avoiding a cliff-edge.

Photo by Lukas Blazek on Unsplash

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