What will an interest rate hike mean for house prices?

Caitlin Morrison
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An interest rate hike could lead to a surge in house purchases in the short term (Source: Getty)

Inflation hit three per cent in September, adding fuel to the fire for commentators calling for a rate hike.

There has been talk of a rate rise for years now, although it hasn’t moved above 0.5 per cent since March 2009. The Bank of England hasn’t increased the rate since December 2007, when it began a series of cuts which culminated in the current all-time low 0.25 per cent rate which has been in place since August 2016. However, Mark Carney has made it clear in recent weeks that an interest rate rise is coming soon, and it's now widely expected that rates will go up tomorrow.

So what would a rate hike mean for house prices?

Traditionally, higher interest means house prices are lower, and experts anticipate this will remain the case.

Higher interest rates mean higher mortgage rates, which buyers don’t want, especially with economists warning of a personal debt crisis. In order to avoid a sharp jump in house prices, the Bank is set to raise rates gradually, with Berenberg economist Kallum Pickering forecasting two hikes in 2018.

The September RICS UK Residential Market Survey showed buyers are already taking a more cautious approach as they consider the implications of shifting interest rate expectations. This contributed to a more subdued London housing market last month, according to the survey.

Push to buy

However, in the near term, a looming rate hike could give reluctant prospective buyers a push.

“The calls for an interest rate rise will soon turn to a clamour, and in the short term this is likely to spur wavering would-be buyers into action,” said Jonathan Hopper, managing director of Garrington Property Finders.

“An increase in the cost of borrowing will inevitably trim demand, but for now those who are in a position to buy are making hay – with many asking for, and securing, sizeable discounts on asking price.”

Price spike

On the other side of that coin however, is the potential for a spike in prices. Paul Smith, chief executive of haart estate agents, warned a rate rise in the coming months “could mean a further surge [in prices], as buyers fight over limited stock in the run-up to Christmas, and look to lock down a cheap fixed rate mortgage before the Bank of England steps in”.

While it may be hard to make a firm conclusion about the long-term implications of a rate rise, all signs point to house prices rising at some stage if rates go up.

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