Rising Mortgage Rates Exert Pressure on UK Housing Market

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The UK housing market is facing renewed strain as mortgage rates in Britain continue to climb, raising concerns among economists. Data from financial data provider Moneyfacts shows that the average rate on a two-year mortgage deal has risen to 5.82%, up from 5.30% just a month ago.

The surge in market interest rates was triggered by persistently high British inflation data, which prompted investors to anticipate further increases in borrowing costs from the Bank of England in the coming months. Consequently, mortgage lenders have responded by offering higher interest rates. HSBC recently temporarily withdrew its mortgage products for new customers until Monday, citing the need to manage its operational capacity and customer service commitments.

Nationwide Building Society, another major lender, also raised its mortgage rates, marking the second adjustment since the Bank of England's interest rate hike last month. Economic consultancy Oxford Economics predicts a potential peak-to-trough decline of 10% in house prices based on the central bank raising interest rates to 5%.

Andrew Goodwin, Chief Economist at Oxford Economics, noted that the repricing of mortgage products coincides with the end of the peak period for existing fixed-rate deals. He anticipates that this will maintain the pressure on household finances, offsetting the benefits of lower energy prices. Additionally, Goodwin expects an increase in financial stress and potentially a rise in forced sales.

Rating agency Moody's has also forecast a 10% drop in house prices, reflecting the mounting challenges faced by the UK housing market. Official data shows that British house prices in March were 3% lower than their all-time peak in November 2022, which marked a 27% increase since before the COVID-19 pandemic.

Crest Nicholson, a prominent UK FTSE 250 housebuilder, projects that high interest rates and the withdrawal of government support for first-time buyers will exacerbate the weakening UK housing market. In a statement to the stock market, the company called on the government to provide additional support, citing softer demand compared to the previous year.

The housing industry is bracing for a slowdown after the Bank of England implemented 12 consecutive interest rate increases. With expectations of further rate hikes to tame high inflation, Crest Nicholson's CEO, Peter Truscott, expressed concerns about higher mortgage rates combined with the conclusion of the government's help-to-buy scheme in England, which hampers potential first-time buyers' ability to enter the market.

Truscott emphasized that a sustained period of elevated interest rates would worsen the situation, impacting demand and confidence. Crest Nicholson reported a drop in sales for the first half of the year, attributing it to economic uncertainty and lower confidence in the housing market, which were consequences of the government's "mini-budget" under former Prime Minister Liz Truss and ex-Chancellor Kwasi Kwarteng.

The company remains optimistic that political solutions, such as improvements to the planning system and affordability measures for first-time buyers, can be achieved through ongoing discussions with the government. However, property experts and economists have differing views on the effectiveness of restarting the help-to-buy scheme, as it is seen by some as contributing to price inflation and benefiting builders' profits.

Despite a modest recovery in sales activity during May, the Royal Institution of Chartered Surveyors warned that "storm clouds" were gathering over the property market. Crest Nicholson's half-year profits dropped 59% to £22.1m, and its shares fell 7% in response to the disappointing results.

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