How mortgage rates have shaped housing for generations

A family unpack cardboard boxes following a house move

The relationship between mortgage rates and the housing market is a complex dance that has influenced homeowners for decades.

Given the dramatic rises over the last 18 months, we thought it was worth exploring this connection from the 1990s to the present day.

The Early 1990s

The 1990s began with significant challenges for the UK housing market. Following the boom of the late 80’s, recession hit in 1990, prompting the Bank of England to raise interest rates significantly in a bid to combat inflation. Interest rates had fluctuated from 7.38% in May 1988 to an incredible 14.88% by the time 1990 had arrived before returning to a more stable 5.13% by the start of 1994.

This surge and fall in interest rates made it increasingly difficult for homeowners to afford a home with mortgage rates reaching double-digit figures. First-time buyers faced high upfront expenses and hefty monthly mortgage payments. Consequently, the housing market experienced a sharp decline in demand, causing a significant 12.3% drop in house prices by October 1992, with the average property price falling to just £53,213.

The Mid 90’s and early 2000’s

This period saw rates fluctuate between this and 7.5% in June 98 before dropping back to 5% in August 01. The events of 9/11 caused havoc for an already fragile economy and sparked a run of reductions that would bottom out at 3.5% in July 03. Things remained stable at around 4-5% until things changed dramatically.

The 2008 Financial Crisis

The 2008 global financial crisis had a profound impact on the world of finance and especially the housing market. The credit crunch tightened access to mortgages, causing a sharp decline in mortgage approvals. This restricted lending, especially for those with small deposits, leading to an 18.8% drop in house prices from their peak of £188,691 in July 2007 to their lowest point of £154,452 in March 2009.

As previously mentioned, in the lead-up to the crisis mortgage rates had been relatively low, fuelling home purchases and driving property prices upward. It is not an exaggeration to say that lenders were literally throwing money at borrowers and it is hard to believe that pretty much anyone  with a 40% deposit could certify their own income whilst other buyers were able to borrow 125% of the value of a house. Looking at things in the cold light of day it is hard to believe that the “experts” thought this would work long term and it is a miracle that the damage wasn’t far greater than it already was.

During the resulting crisis, the Bank of England significantly lowered the base interest rate to stimulate the economy, resulting in historically low mortgage rates. However, the crisis also brought about much needed stricter lending criteria and reduced availability of high-risk mortgages.

The economic uncertainty and stricter lending standards posed challenges for some in securing financing for their homes but in the main a whole generation of homebuyers and homeowners enjoyed, and got used to, interest rates that had never been seen before.

The 2020 Pandemic

The arrival of the COVID-19 pandemic in March 2020 and subsequent lockdowns disrupted the UK property market. Uncertainty loomed as the government discouraged house moves to curb the virus’s spread. However, the property market displayed resilience, with sales decreasing by 55% in April 2020, less severe than the predicted 70% drop. During this period, average house prices dipped to £230,318.

To stabilise the economy, the government introduced measures such as the Stamp Duty Holiday, offering tax relief on property purchases in England and Northern Ireland. The Bank of England lowered its base interest rate to a historic low of 0.1%, translating to exceptionally affordable mortgage rates.

Hindsight is a valuable tool and reviews of decisions taken then need to reflect the unprecedented set of circumstances, however it could be argued that too many steps were taken too soon. This, coupled with changing work-from-home dynamics, prompted buyers to reassess their housing needs, leading to increased demand for larger homes with home office spaces and access to the countryside.

Consequently, we had a much distorted housing market as rural, and coastal areas witnessed rising house prices, while flats became less popular. Overall, the pandemic reshaped the property market, creating a favourable environment for homebuyers.

Current Housing Market & The Future

In the past year, the UK housing market has seen significant changes. While average house prices rose by 9.5% year-on-year to September 2022, 12 months later this figure had dropped to 0.6%. Given that these figures are always 6-9 months behind the curve it is highly likely that prices are currently falling at a startling rate.

The problem that this lag creates means that anyone making a decision does not have accurate or up to date data to help them and it is highly likely that only the brave souls who price their properties very competitively are going to be the ones who get moving.

Informed opinion says that as long as inflation has been beaten for now and begins to fall, we are likely to see interest rates follow a similar trend which will be much welcome news. Talk of rates in the region of 3% are possibly optimistic but, with an election on the way in a little more than 12 months, the government will be doing everything in its power to create an environment where they will fall significantly from the current rate of 5.25%.

What is absolutely for certain is that the days of ultra low rates are now consigned to history and we are all going to have to readjust to rates that are more in line, but probably lower, than we have seen historically.

Time will tell…

PLG Consultants

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