Opinion: a bit of perspective is needed on rising interest rates

As many media reports speculate whether a house price crash is on the horizon, partly due to rising interest rates, Joanne Christie questions whether some perspective is needed.

Over the past couple of weeks, there have been so many reports of an impending house price crash, one could be forgiven for thinking it was an outright certainty, at least to some extent.

Many reasons have been given for the up to 20% fall the worst doom-mongers are predicting, with the rising cost of living and end of the Covid-fuelled buying spree among the reasonable arguments for some kind of easing of the recent house price rises.

The increase in the National Insurance rate is also likely to put a strain on many potential homebuyers’ finances, as well as soaring energy prices.

But the idea that rising interest rates will be a big factor and could even push us back into a 1990s-style house price freefall needs to be put into some perspective.

We’re in a very different place to right now. Though clearly, we’re facing intense inflationary pressure, as was the case then, the current Base Rate of 1% is a long way from the 14% rate when that decade began.

While many predict the rate will rise further, it’s widely expected to be by a couple of percentage points. For example, research consultancy Capital Economics expects the Bank of England to increase the Base Rate to 3% by next year.

And, unlike back then, we don’t have double-digit unemployment to contend with; in fact, it’s at a 50-year low.

Those predicting a crash have also drawn comparisons with the crash that happened after the global financial crisis, but even with a 3% Base Rate, mortgage rates are likely to still be far lower than they were before and immediately after that crisis.

Higher Base Rate ‘unlikely’ to deter potential homebuyers

As someone who tried (but failed) to buy my first home in the crazed 2007 housing boom, to me it seems a little unlikely that a Base Rate of between 1% and 3% will put people off buying, at least not in the long term.

Back when my husband and I were looking in 2007, the Base Rate was 5.5% and it didn’t seem to be deterring anyone.

We gave up looking as we got tired of crowded open house viewings, intense competition, and the fact that even when you made an asking price offer, agents sometimes laughed at you.

Our decision not to buy then didn’t have anything to do with interest rates as at the time the rates on offer seemed normal.

Indeed, they were normal from a historical perspective – it’s the ultra-low rates we’ve gotten used to over the past 10 years or so that are in fact, abnormal.

And although in some ways it turned out to be a blessing in disguise that we didn’t buy in 2007 because the next year prices fell, that wasn’t necessarily the great news we thought it was going to be.

Rather than sell their properties for less than they had been worth a year ago, lots of people who wanted to sell just didn’t.

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Many were able to manage this because even if they had to move, interest rates were low enough to allow them to refinance and rent out their old properties until the market improved.

By the time we completed on our first home in 2010, the Base Rate had fallen to 0.5%.

Unfortunately, due to high swap rates (the rate at which banks lend money to each other) and a lack of enthusiasm for lending from banks, mortgage rates were still higher than 5%.

The deal we got had a rate of 5.78%, but it didn’t deter us from buying. Nor did we ever regret buying that first house, which increased in value over the three years we owned it and provided a good first step on the property ladder.

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Escalating mortgage rates

We’re currently on a fixed rate ending in December, so will definitely be hit hard by escalating mortgage rates – and we’re expecting our next rate to be much higher than our current one, so sacrifices will have to be made to accommodate this.

But we won’t be selling up due to interest rates and if we wanted to move, we wouldn’t change our plan due to this either.

In fact, we’re probably more likely to move than we were a year or two ago.

We were planning a loft extension, but the cost of this has more than doubled from what it was when we first started looking into it a few years ago.

The rise in building costs (both labour and materials) has been far greater than the rise in interest rates, and in our case, the cost now seems somewhat ridiculous.

I’m hoping some of the factors that led to this situation might change in the next few years and allow us to go ahead, but if they don’t, it would probably make more sense to move than extend our current property, even if interest rates go up further.

For at least seven years, I’ve benefited from ultra-low mortgage rates. It’s been brilliant and I’m naturally dreading having to pay higher rates going forward. But at some point, I was expecting it to happen and I’m sure many others were too.

Given expert economists consistently get house price predictions wrong, I personally have no way of knowing if house prices will actually crash.

But if they do, I doubt it will be because interest rates return to more historically normal levels.

In any case, it certainly shouldn’t be.

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