How Predicted Lower Interest Rates Impact the Housing Market?

Recent statements from the International Monetary Fund (IMF) predict interest rates in the UK to fall. The IMF forecasts that a combination of low economic productivity and an ageing population will cause the end of rising interest rates. Whether you are a homeowner, or a first-time buyer, understanding how lower interest rates will impact the housing market, can help you know the best time to buy, sell or invest.

What Has Caused High Interest Rates?

In the UK, inflation is at its highest level in nearly 40 years due to rising energy prices and the increased cost of food. Therefore, interest rates have been rising to combat the rate of price rises.

The Bank of England has been raising interest rates since December 2021. In under two years, interest rates have climbed from 0.1% to 4.25%. As a result, mortgage payments have increased for many homeowners across the UK.

It’s difficult to put focus on just one event that has led to high interest rates. However, the impacts of Covid 19 on the economy and Russia’s invasion of Ukraine impacting energy costs are labelled as catalysts for rising interest rates.

Why Is IMF Predicting Interest Rates to Fall?

Although interest rates are at a high, in a blog the IMF said that “recent increases in real interest rates are likely to be temporary”.

The IMF added: “When inflation is brought back under control, advanced economies’ central banks are likely to ease monetary policy and bring real interest rates back towards pre-pandemic levels.” These real interest rates will consider inflation.

The IMF did not say, exactly when interest rates were set to fall back to lower levels.

How Lower Interest Rates Will Impact the Housing Market

How Will Lower Interest Rates Will Impact Homeowners?

As those who bought houses just before the interest rates shot up will know, it pays off to take advantage of lower rates when it comes to buying and selling.

If you are a homeowner, you might be wondering how these prediction will affect you and your property and what investment opportunities will arise.

Lower interest rates, allows the market to open up as mortgage costs become more affordable. As a result, more buyers enter the market and the demand for houses increases. If you are looking to sell your property, or bought your current property as an investment, this can be good news for you. Not only does it mean you are likely to have an easier time selling your property due to a higher demand, but also means you are likely to sell it for a larger sum due to increased buyer competition.

Increases in Buy to Let Properties

As seen historically, lower rates often correspond with an increase in buy-to-let properties. This is as the cost of mortgage repayments becomes less than rental income resulting in a large incentive for those looking to invest in the housing market.

Will Lower Rates Provide Relief to Mortgage Owners?

For those whose fixed term mortgages is coming to an end or those who are on a variable rate mortgage, there might be some hope for more affordable mortgage repayments in the future.

However, IMF’s observation about the falling interest rates, sadly doesn’t offer much immediate relief to struggling mortgage holders. IMF is warning mortgage holders that their analysis only applies after the current period of high inflation ends. Additionally, the analysis only applies if the government keep their debts in order.

The report says, “post-pandemic increases in interest rates could be protracted until inflation is brought back to target”.

However, over the coming years and decades IMF is emphasising that what we consider as a “normal” level of interest rate has fallen in the UK.

Once adjusting for inflation, the implication is that a more normal real rate is close to zero. Therefore, we can assume inflation will settle back at its target level of 2%, that is consistent with Bank of England base rates around 2-3%, compared to the 4% and above that the rate is now.

How Lower Interest Rates Will Impact First Time Buyers?

As it stands, the housing market has been difficult to enter as a first-time buyer as high interest rates have made getting a mortgage more difficult. With high rates, many people looking to become first time buyers have no choice but to continue renting rather than take on an expensive mortgage.

Although lower rates allow for more affordable mortgages, it can be a double-edged sword as the financial barrier that stopped potential buyers breaks down and the market becomes competitive again.

Why an Aging Population May Lower Interest Rates?

The Washington-based financial institution has claimed that ageing populations would be a likely factor to lower inflation.

George Godber, fund manager at Polar Capital states that one-way older people affect inflation is that they tend to spend less than the younger generations.

“The amount that you spend relative to your income is highest when you’re in your 20s, 30s and 40s – often that’s maybe young families, when you’ve got households forming, you’ve got couples coming together, they tend to spend the most when they decorate and buy a car or whatever, and you as you get older in life you slow down your consumption,” he told the BBC’s Today programme.

“There’s less heading to Glastonbury and nights out on the town, there’s more sitting at home and watching the Antiques Roadshow, so, therefore, your spending patterns sort of reduce and you save more and so an ageing population tends to be disinflationary.”

Andrew Bailey, governor of the Bank of England recently said that in the UK, the share of adults aged between 20 and 59 years-old has fallen below 65% This has happened only in the last 10 years. However, Mr Bailey says “it is set to decline further in the coming years”.

Mr Bailey states that the fall in the share of adults between 20 and 59 years old has been driven by a decline in birth rates and people living longer.

Why Low Productivity May Lower Interest Rates?

The IMF also states that low productivity, which is the term meaning how many goods and services the UK is producing, would reduce inflation.

Prior to the financial crisis of 2008, the country’s manufacturing sector has been boosting UK productivity.

“But following the financial crisis, manufacturing productivity growth fell back sharply. This fall in manufacturing productivity is the main cause of the slowdown,” he said.

Prior to the Covid pandemic, the UK’s interest rate was 0.75%. However, the Bank of England cut it twice in March 2020 to 0.1% as the UK entered lockdown.

Over the past couple of years, interest rates have steadily risen, hitting 10.4% in February – more than five times larger than the Bank of England’s 2% target.

Following the decision to raise UK interest rates again in March, the Bank of England said that it expected inflation “to fall sharply over the rest of the year”.

The government attribute the sharp fall due to their help with household heating bills through their Energy Price Guarantee Scheme in addition to the falling wholesale gas prices.

However, Mr Bailey declined to say whether he believed that interest rates had reached a peak.

Looking to the Future

It’s unlikely that the UK housing market will return to the ultra-low interest rates that it saw pre-covid. However, with the slight lowering of rates after adjusting to inflation, many are hoping the housing market will open again for investment and new buyers.

Many long-term factors influence whether interest rates will fall. Some examples of these trends are an aging population, migration, tax, spending policy, and the growth of the economy. However, analysis from these trends all point towards a UK where after the hardships of the last few years, there will eventually be a new normal for interest rates, which we will settle into.

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