Bank of England base rate – what happens next for property prices?

Rise designed to counter expected global surge in inflation.

The Bank of England (BoE) is expected to continue the upward trajectory of the base rate throughout the year, according to Barney Iles, senior lending manager at Blend Network, impacting property prices.

The BoE has raised interest rates to 1%, hitting the highest level in 13 years in an effort to curb inflation due to rising costs of energy and other commodities in the global market.

The rise announced yesterday (May 05) was designed to counter an expected global surge in inflation caused by rising fuel prices as a consequence of Russia’s war in Ukraine.

“The bank has been under pressure to continue to tighten monetary policy to tame the dramatic surge in inflation that has been intensified by the war in Ukraine,” Iles explained.

The Bank of England has confirmed that its inflation target is 2%, which is far lower than the current inflation rate of over 6%. The rate of inflation is expected to continue its rise over the course of 2022, impacting energy bills, with the expected annual average costs increasing by £700 per person.

While house prices have also risen during this period, they have started to slow down, as evidenced by the Nationwide House Price Index which showed that UK house prices grew by 12.1% year-on-year in April, down from 14.3% in March.

Prices rose by 0.3% month-on-month, after taking account of seasonal effects, representing the ninth consecutive monthly increase, though this is the smallest monthly gain since September last year.

“We believe that the recent rate hike and the prospect of further hikes will no doubt ease some parts of the property market, but not all,” Iles added.

For example, he believes that first-time buyers and buy-to-let investors are likely to take a step back to assess the market before pursuing more transactions.

Residential property transactions in the UK were significantly lower in March this year compared to the prior year, the latest HMRC Property Transaction data showed. HMRC reported that the non-seasonally adjusted estimate of UK residential transactions in March 2022 was 110,990, about 36.2% lower than the figures from March 2021.

The seasonally adjusted estimate was 114,650, around 35.7% lower than that of the previous year.

It is worth noting that HMRC has said that year-on-year comparisons for UK residential transactions should be treated with caution as significant forestalling was still observed in March 2021 caused by the temporarily increased nil rate bands of Stamp Duty Land Tax and Land Transaction Tax.

Iles went on to say, however, that he believes property development will continue to push forward.

“As specialist development finance lenders, we at Blend Network see a very buoyant market for development with developers looking for deals amid the ongoing housing shortage,” he said.

Iles also mentioned the north and south divide across England, with regions outperforming one another depending on location.

“Also, geographically speaking, some UK regions will continue to outperform others; in particular, we are bullish on parts of the north around Manchester, parts of the Midlands around Birmingham, and pockets of the Northeast around Newcastle,” he concluded.

Written by: Houseladder