Interest rate increase to 1.5% could wipe £28k off the average house price

April 12, 2019

The latest research by the property finance specialists, One77 Mortgages, has looked at what a notable hike in interest rates could do to the UK property market.

When looking at the correlation between changing interest rates and the average house price it’s clear that the two move in tandem and when rates go up, prices soon fall and as they’ve dropped prices have increased.

In the last 30 years, there has been just one notable event whereby interest rates increased rapidly, more than doubling from 7.38% in May 1988 to 14.88% by October 1989.

Accounting for fiscal lag, the house market-maintained price growth momentum until August 1989 when the average house price peaked at £60,701. Between that point and October 1992, the average house price fell by 12.3%, £740 per month, with the market bottoming out at £53,213.

With Brexit continuing to cast dark clouds over the economy a number of rates increases could well be implemented if a deal is not reached and should they double to reach just 1.5%, history could repeat itself and see a 12.34% decrease in the current average house price. If this were to happen, it would equate to £28,153 wiped off property values.

Managing Director of One77 Mortgages, Alastair McKee, commented:

“For many homeowners, the current rate lows of sub 1% are all they’ve ever known, however, this could soon change should the current period of economic uncertainty continue.

Even a minor increase to 1.5% could not only translate to a substantial increase in monthly mortgage payments for UK homeowners but could also see the price of their bricks and mortar investment fall.

We’ve seen what Brexit uncertainty has done to the market already where the rate of price growth is concerned although it remains in good health considering, fuelled by a strong level of mortgage approvals. However, if we were to then see this buyer demand evaporate due to a hike in rates, the market could suffer further and see price growth fall into the negative.”

Double in interest rates
Date
Rate
17-May-88
7.38
03-Jun-88
7.88
10-Jun-88
8.38
24-Jun-88
8.88
07-Jul-88
9.88
21-Jul-88
10.38
08-Aug-88
10.88
25-Aug-88
11.88
25-Nov-88
12.88
25-May-89
13.75
31-Aug-89
13.84
04-Sep-89
13.88
08-Sep-89
13.75
06-Oct-89
14.88
Resulting Drop in House Prices
Date
Rate
31-Aug-89
£60,701
04-Sep-89
£60,701
08-Sep-89
£60,701
06-Oct-89
£59,533
08-Oct-90
£57,901
13-Feb-91
£57,086
27-Feb-91
£57,086
22-Mar-91
£57,086
12-Apr-91
£56,853
24-May-91
£56,853
12-Jul-91
£57,959
04-Sep-91
£57,959
05-May-92
£55,166
22-Sep-92
£55,328
16-Oct-92
£53,213
Total Drop
12.34%
Current Average House Price
£228,147
12.34% Drop on today’s values
£28,153

 

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