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Update: What next for the UK housing market?

Rising interest rates, together with higher energy and food bills, have reduced demand for new housing, slowing the growth in UK house prices. The recently announced cut in stamp duty is likely to be insufficient to support the housing market, given a continuing cost of living crisis.

The UK housing market has remained relatively strong throughout 2022. So too have house prices, although this growth has eased recently due to the economic turmoil that has emerged as a result of higher inflation and the worsening cost of living crisis.

The latest Halifax House Price Index (for August 2022) shows that house prices increased by 0.4% from July, while the average rate of monthly house price inflation over the last year has been 0.9%. On the other hand, the average house price rose to a new record high of £294,260 in August – 11.5% higher than August 2021 (though annual house price inflation was slightly lower than July’s rate of 11.8%).

Several factors have kept house prices buoyant. On the demand side, certain groups were able to save a lot during the periods of lockdown, boosting household savings by around £200 billion. In addition, an increase in remote working led to greater demand for larger houses. Previously ultra-easy monetary policy and relaxation of counter-cyclical capital buffers by the Bank of England also contributed to keeping house prices high.

On the supply side, planning restrictions and supply chain bottlenecks over the past year have limited the procurement of key materials for construction. This has had the knock-on effect of keeping the supply of new homes tight and prices elevated (see the previous version of this piece for more details).

How is the cost of living crisis affecting the housing market?

Despite the strength that the housing market has shown against an abysmal economic backdrop, both data and survey evidence suggest that activity is slowing. The continued rises in energy and food bills are reducing demand in the housing market as people feel their budgets are squeezed. This pressure is slowing the growth of UK house prices (see Figures 1 and 2).

Figure 1: Monthly housing transactions and mortgage approvals

Source: Bank of England. Note: the shaded turquoise area shows projected values.

Figure 2: Monthly percentage change in house prices

Source: Bank of England

How might tax changes outlined in the recent ‘mini-budget’ affect housing?

On 23 September 2022, the Chancellor of the Exchequer, Kwasi Kwarteng, introduced a cut in the stamp duty on residential property transactions. (This is similar to the actions of one of his predecessors, Rishi Sunak, during the height of the pandemic in 2020 and 2021.) Kwarteng also doubled the 0% stamp duty threshold for residential properties from £125,000 to £250,000.

In addition, the Chancellor increased the threshold above which first-time buyers start paying stamp duty: from £300,000 to £425,000. The maximum amount that an individual can pay while remaining eligible for first-time buyers’ stamp duty relief was also increased to £625,000.

While this policy reduces transaction costs, and may encourage demand, the danger is that increased demand will translate into higher house prices without helping home ownership grow.

The wider macroeconomic conditions are also important here. The impact of the recent tightening in the Bank rate by a further 50 basis points (to 2.25%), a weaker pound and the potential positive effect of the mini-budget on inflation and short-term interest rates are likely to outweigh the benefits of the stamp duty cut.

What does this mean for mortgages and house prices?

The interest rates on the loans provided by financial institutions (including residential mortgages) are linked closely to the Bank rate. Subsequently, an increase in the Bank rate will translate into higher mortgage rates (although not by the same magnitude).

The increase in debt servicing costs will affect variable and tracker rate mortgage holders, rather than fixed-rate mortgage owners (although buyers applying for a new fixed-rate mortgage or existing fixed-rate mortgage owners who need to refinance will also be affected by higher interest rates on their mortgages).

Mortgage rates have already been rising for new mortgage holders, even before the latest political developments. This was due to a general tightening in monetary policy introduced to try to slow inflation. In the second quarter of 2022, the weighted average interest rate on fixed-rate residential loans and variable-rate loans increased by 0.25 and 0.64 percentage points, respectively, since the last quarter of 2021.

But at the time of writing, they are lower compared with historical mortgage rates (see Figure 3). In August 2022, the Bank of England reported that lending rates for new fixed-rate mortgages rose across all loan-to-value (LTV) ratios by between 8 and 25 basis points, with high LTV mortgage rates returning to peak levels last seen during the height of the pandemic.

Figure 3: Overall weighted average interest rate on mortgages (%)

Source: Financial Conduct Authority

Higher monthly mortgage repayments will reduce people’s disposable income. This is likely to have a negative impact on discretionary consumption, and therefore GDP. Prior to the latest policy changes, the National Institute for Economic and Social Research (NIESR) forecast that real personal disposable incomes would decline by 2.5% in 2022 and 0.8% in 2023.

First-time buyers are likely to be discouraged from applying for a mortgage because of rising debt servicing costs at a time when inflation is already eroding real disposable incomes. This could, in turn, reduce demand for housing and cause house prices to fall.

The stamp duty reform is unlikely to encourage many new house purchases, as prices remain relatively high and the cost of living crisis continues. It should be noted that during the height of the pandemic, when stamp duty was initially cut, it encouraged house purchases because of the change in consumer trends, which bolstered savings, and more significantly, because the UK’s cost of living crisis was yet to emerge.

Will the housing market collapse?

One view is that unless policy-makers set out a clear plan on how to control public sector borrowing and balance the public finances, the Bank of England will need to contain domestic demand and inflation by more aggressive Bank rate hikes. This could then result in a significant decline in house prices and lead to negative spillover effects across the housing market and the wider economy.

An alternative view is that the worrying economic outlook has reduced the risk appetite of lenders. This, in turn, has helped to prevent the build-up of systemic risk and large-scale disruption in the housing market, particularly as house servicing costs rise.

Gross lending secured on dwellings in August 2022 was £3.2 billion lower than in May 2022. The latest data on household credit growth show that for the three months to December 2021, it was 3.2% – five times lower than before the global financial crisis of 2007-09 (see Figure 4).

Figure 4: Household credit growth (%)

Source: Bank of England

Even prior to the recent developments, there has been a reduction in risky mortgage lending since the global financial crisis, which has limited the build-up of financial vulnerabilities. In June 2014, the Bank of England’s Financial Policy Committee introduced more thorough affordability checks on potential mortgages, alongside banks facing limits on the supply of very high loan-to-income mortgages. This set of ‘macroprudential’ policies has helped to manage mortgage lending risks.

Figure 5: Proportion of residential lending to individuals – by type

Source: Financial Conduct Authority

It is also worth noting that fixed-rate mortgages make up the lion’s share of total mortgages in the UK, at around 95% (see Figure 5). These homeowners are already tied into a mortgage product that offers, for example, a fixed rate of interest for either two years or five years.

As of March 2022, around 60% of current fixed-rate mortgages were on five-year contracts. This means that an increase in the interest rate is not going to have an immediate effect on households’ monthly repayments (or cause repercussions to the entire UK housing market) unless these households are refinancing or applying for a new fixed-rate mortgage. Roughly one-third of households are unaffected by interest rate rises as they already own their houses outright.

Another factor that will help to prevent large-scale disruption in the housing market is the greater proportion of double-income households with mortgages (see Figure 6). A household managed by two individuals with two sources of income is likely to be better equipped to cushion themselves against higher living costs.

Figure 6: Residential loans to individuals

Source: Financial Conduct Authority

The prevalence of these types of homeowners will reduce the probability of large-scale defaults even if mortgage rates continue to rise. It is also possible that two employed and financially secure individuals may be more confident when purchasing a house, irrespective of the current climate, further supporting housing demand.

What about the rental market?

Private rental prices in the UK increased by 3.4% in the 12 months to August 2022 (see Figure 7). This was the largest annual growth rate since this series began in January 2016. A double whammy of excess tenant demand and shortage in supply has kept rental rates high.

The latest Royal Institute of Chartered Surveyors (RICS) report for August 2022 suggests that these supply shortages have resulted from changes in regulation and taxes. They also show that rental prices are forecast to increase by 4% on average across the UK, over the next year.

Figure 7: Annual growth in rental prices in the UK

Source: Office for National Statistics

Although changes in monetary policy are not going to affect tenants directly, the worsening cost of living crisis will have more of a direct impact on those renting. Landlords can increase rental rates as economic conditions change – for example, in the wake of higher interest rates.

Consequently, this would reduce demand for rental properties relative to residential properties. And because of rising costs across the board, there are heightened risks that rent arrears may increase, particularly during the winter. This could reduce demand in the rental market.


Unless the UK government lays out a concrete plan for controlling the public finances and helps to reduce financial market turmoil, the Bank of England will need to raise interest rates by more than is currently expected in order to contain excessive inflationary pressures. If rates rise too high, there is a risk that house prices will decline sharply.

That said, given the lower risk appetite of lenders, a larger share of fixed-rate mortgages, a relatively higher proportion of outright owners and a relatively small proportion of mortgages needing refinancing over the next year, higher mortgage rates alone are unlikely to cause significant financial disruption or lead to wide-scale defaults.

The surging cost of living – which is squeezing disposable incomes – together with rising interest rates are more likely to affect those in rental accommodation, those with variable-rate mortgages, those who are first-time buyers or those needing to refinance their mortgages, compared with fixed-term mortgage holders who don’t need to refinance in the short term.

The higher cost of living may even discourage risk-taking by prospective homeowners, particular single applicants, especially if they are forced to run down savings to meet the higher cost of living. This may in turn depress demand for new housing, slowing down price growth, despite the stamp duty incentives.

Where can I find out more?

Who are experts on this question?

  • Barry Naisbitt (NIESR)
  • Paul Cheshire (LSE)
  • David Miles (Imperial College London)
  • Geoff Meen (University of Reading)
  • Christine Whitehead (LSE)
Author: Urvish Patel
Editors’ note: This is an update of an Economics Observatory article originally published on 29 June 2022 (previous version available here).
Picture by William87 on iStock
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