It’s been 4 months since we wrote about the macroeconomic factors that affect the British economy. A lot has happened since we wrote that blog in January – we have seen war in Europe and further COVID lockdowns in China.

But how do these global events affect us here in the UK? How do they affect you personally? As we start to see the effects filtering through to our economy in the UK, will we all start to feel the pinch? 

In this blog we will explore what we believe lies ahead for the British economy, for house prices, inflation and the mortgage market.

Have UK house prices reached their current cycle peak?

Since the housing and banking collapse of 2008, the Bank of England has been printing money to bolster the economy. This is known as quantitative easing (QE), which is the printing of money which is then used to buy government and corporate bonds. 

Then in 2020, Covid became a part of our lives, and further money was made available in the form of grants and loans to individuals and businesses. The effect of this has been to inflate assets, including the stock market and house prices. 

China has continued its lockdowns, and this has affected supply chains. This has decreased the availability of materials, which has increased their prices.

Russia invaded Ukraine, causing further supply chain issues (mainly with oil and grain, but also with other materials).

India has now stated that they will not export grain, further adding to the supply chain issues. 

What we now have is a perfect storm which has been brewing for the last 10+ years, but which has escalated more recently.

What is inflation, and how does it affect me?

Inflation is the rising cost of goods as measured by the consumer price index (CPI). When inflation is high, it means it costs you more to travel, eat and drink. 

Your earnings are also directly affected by inflation – it is likely that you will have less disposable income as your outgoings increase, while your salary stays the same.

Did you know? £10 in 1949 adjusted for inflation would be worth £265 today! Try your own calculations here

Inflation in the UK is now at 9%, which is up 2.5% on the previous month and up 9% on the year. The UK government has a target of 2%, so something must give. The Bank of England expects inflation to reach a maximum of 10% and fall back to 2% within a few years.

The question is, how do we get from 10% down to 2%?

Do higher interest rates mean that mortgages cost more?

One way to control inflation is to raise interest rates. Bank base rate had been below 1% since March 2009, until it came back up to 1% in May 2022. 

The Bank of England base rate has gone up by 1000% in less than 6 months! In December 2021 it was 0.1%, and as of today it is 1%. It is expected to reach 1.75% to 2% by the end of the year, with rates soaring as high as 2.5% in 2023. 

Rising interest rates make it more costly to borrow and more attractive to save, thus reducing the amount of money people are spending on goods. Rising interest rates make mortgages more expensive. If you can’t afford to borrow as much, then the value of house you can afford will fall.

How will this affect house prices?

The housing market is a complex puzzle.

On the one hand, we have a lack of housing stock. A lack of housing in the UK isn’t new, and no matter what governments say they will do to increase housing stock, they don’t control the housing stock. Therefore, we will always have a housing shortage – this is good news for homeowners, but not for first-time buyers. 

On the other hand, property prices have risen significantly since the UK government started quantitive easing in March 2009. According to the office of national statistics (ONS), the average house price was £190,032 at its 2007 peak, before falling nearly 20% to £154,452 in March 2009. 

Once the money printers were switched on in March 2009, property prices have risen to an average of £273,762 in January 2022. That’s an increase of approximately 44%.

What do you think will happen to house prices now that quantitive easing has been switched off, interest rates are rising again, and inflation is at 30-year highs? Will we see 20% knocked off the housing market as we did in 2008? What do the ‘experts’ think?

Grainne Gilmore, head of research at Zoopla says “Buyer demand remains high, but there are now signs that the market is softening, and price growth is set to slow – we expect +3% price growth by the end of 2022”.

Andrew Wishart, Senior Property Economist at Capital Economics comments Our new, higher, interest rate forecasts mean that we now expect house prices to fall marginally in 2023 and 2024. While there are risks on both sides, our base case is that prices drop by 5% overall, reversing a fifth of the surge in house prices since the pandemic began.”

Wesley Davidson, Director at Fox Davidson believes that property prices will fall later this year and into 2023. Wesley comments “You can’t expect property prices to continue to rise all whilst interest rates are increasing, inflation is high and quantitive easing has been switched off.  With an improving economic situation which is entirely dependent on worldwide economic factors, this drop could be short-lived, but we will have to wait and see how the macro environment plays out. I expect house price inflation (approximately 8.9% year on year) to fall by around 10%, and expect house prices to be down by around 5% from current highs in 2023. 

Is the UK heading for a recession?

We now have rising interest rates and inflation at levels not seen since the early 1990’s. Furthermore, quantitive easing has stopped as of December 2021. So, now we have less cash stimulating the economy, what seems to be the likely outcome?

We believe that the UK will enter a recession, which is where the growth in the economy is negative for 2 quarters in a row. Some economists argue that we will not see a technical recession, but with economic growth at near zero for the next 1 or 2 years, it will sure feel like a recession. 

The effects of a recession are less spending. Businesses and households will start to make cuts. We expect businesses will make job cuts, while asset prices such as cars, houses and stocks will fall. 

Government policy during these times is going to be crucial in keeping the economy going. Let us hope that they make the right decisions, whatever they may be. 

Final thoughts

Let’s hope that this inflation is transitory, and we could be over the worst of it by mid-2023. If global supply chains open and inflation comes under control, we will be in a much better place. 

With regards to mortgages and house prices, we have seen lenders offering 95% mortgages, which has helped buyers get on the property ladder. The Bank of England is also proposing to relax affordability rules, which will allow for increased borrowing. Having said that, lenders are tightening affordability by factoring in the rising cost of living into their affordability models. 

For developers and house flippers, now is the time to really do your homework and ensure that you can take a reduction in sale prices, and it wouldn’t hurt to factor in a 10% drop. Negotiating harder with landowners on price is a must. 

For those who are buying a family home to live in for the next 3+ years, the house price fluctuations over the next 2 years shouldn’t matter in the long term, but you should ensure that you can afford the mortgage and have plenty of disposable income to absorb the inevitable increase in energy costs later this year.

Be prudent.