The housing boom during the pandemic was quite pronounced, while it also seemed to occur in a number of developed nations including the US and UK.
In the States, however, the pandemic housing boom has finally met its macroeconomic match, in the form of spiked and continually increased mortgage rates. More specifically, mortgage rates have been hiked in a forlorn attempt to curb rampant inflation, peaking at 6.28% in June and undermining property market growth in the process.
A similar trend is now occurring in the UK, with economists warning of a potential house market crash in the near-term. But is this really likely, and what role will inflation and interest rates play in determining this outcome?
The Price of Properties in the US and UK
The housing market is already showing signs of slowed growth in the US and rising interest rates continue to drive up mortgage costs and reduce the demand for real estate.
In the UK, homeowners have been warned that the value of their properties could plunge by up to 40% through 2023 and 2024, as people come off fixed-rate mortgage agreements and potentially face a scenario where they can’t repay their monthly payments.
Aspiring buyers will also be deterred from entering the market as interest rates soar, while this demographic will continue to be adversely impacted by rampant inflation and a depressed macroeconomic climate.
Certainly, further interest rate hikes are being pledged by the Bank of England (BoE) in the UK, even before the pound crashed to a record low following the recent mini budget by the government.
Interest Rates and the Housing Market
Because inflation and interest rates enjoy an inverse economic relationship, the base rate is often hiked in response to rising inflation and the continued devaluation of the pound.
Still, this measure is only marginally effective in instances where inflation is slightly above the BoE’s 2% target, and rising rates are currently having little impact on the level of inflation on these shores.
At the same time, hiking the base rate of interest causes the cost of borrowing to rise accordingly. This means that many will find it hard to secure affordable mortgages, while those on variable rates may also struggle to repay their secured debt.
This could see a slew of repossessions as the demand for property continues to decline, potentially pushing the housing market towards an eventual crash.
As for corporations involved in real estate projects, this could spell an end to easy times where private loans were available at low rates and more flexible terms. Having a global legal firm to consult can be beneficial in this instance when trying to better understand uncertain market conditions.
What About the Role of Inflation?
As we’ve already touched on, the base rate hike has been commissioned to help combat inflation. Some will argue that this has already had a small impact on inflation, which fell from 10% in July to 9.9% during the following month.
It’s important that nations like the UK and US get a hold of inflation, as this continues to drive down real wages and make it hard for people to save and optimise their disposable income levels.
This makes it harder for people to secure mortgages and save towards a deposit, especially if they’re already unable to repay their monthly debt liability.