Will higher interest rates finally halt house prices?

UK house prices continue to climb, but could higher interest rates be the one thing to stop them? Kate Anderson takes a look.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

'For Sale' sign outside of a terraced house in the UK

Image source: Getty Images

Everybody thought that the end of the Stamp Duty holiday would prompt house prices to finally fall. Yet, that has not been the case. Halifax’s house price index shows that prices rose by 1.7% in September – the largest monthly increase since February 2007.

So is there anything that can halt the runaway train that is house prices in the UK? Well, it may just be that a hike in interest rates could cause a derailment.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!


What’s happening with house prices?

Last month, UK house prices recorded their strongest monthly rise since 2007. This translated to a £4,400 increase in the average cost of a home. It also reversed a three-month downward trend in annual growth that began in June. The average price of a house in the UK now stands at £267,500.

But it’s important to take these figures with a pinch of salt. The Stamp Duty holiday finally finished on 30 September, so the rise during the month would have included those rushing to meet the deadline.

Having said that, there is still evidence of a ‘race for space’ caused by the pandemic. Housing is also still in short supply, which only drives prices in one direction. So is there anything that can stop the house price boom?

What will higher interest rates do to house prices?

Enter stage left: higher interest rates. Right now, the housing market is experiencing low borrowing costs. A base rate of just 0.1% has led to some lenders offering sub 1% mortgage deals.

However, this is likely to change earlier than anticipated. Climbing inflation has led the Bank of England to indicate it may increase the base rate sooner rather than later. With interest rates having kept borrowing costs low for so long, any rise is likely to have a big impact.

Currently, average mortgage rates sit around 2%. If the base rate was to go up by 2% to combat inflation, then mortgage rates could go up to 3% or more.

Due to the house price boom, the ratio of average home prices to average earnings is already high. If you introduce higher borrowing costs, then the housing market is left vulnerable. Buyers may be priced out of the market.

It also changes the ‘opportunity cost’ of holding property. Opportunity cost is a way of describing what you may be missing out on when you go with your chosen option. So in this case, if you hold onto property with increased borrowing costs, you could be losing out compared to what you could earn from other forms of investment.


Can rising interest rates bring house prices down?

It is likely that an increase in interest rates will have an impact on house prices. To buy a house, most buyers will need a mortgage, and if interest rates rise, the cost of that mortgage could become unachievable. With that, it’s likely there will be a drop in demand, which could lead to lower house prices.

It is hard to say what will happen for definite. There will still be people who want more space following the pandemic. And there is still a huge issue with housing supply.

But it may well be that higher interest rates could just take the heat out of house prices, moving them off of their current trajectory.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »