"There are murmurs in the market that the government's war on landlords has gone too far, and that the government may even rethink their upcoming legislative changes, such as the Renters' Reform bill"
The UK base rate has been raised for the twelfth consecutive time, with a further rise to 5% anticipated to be more likely than not. And there is now a one-in-four chance that the rate will hit 5.25% by Autumn.
The outlook for the UK property market is highly uncertain, given the recent increase in interest rates. This will make it more expensive to borrow for mortgages and could lead to a slowdown in the market as buyers are unable to secure the finance they need to purchase property.
The Bank of England has indicated that any further increases in interest rates will be gradual, which should reduce the impact on buyers. There's optimism that the UK property market may become buoyant in the long term, and whilst house price increases over the last 12 months show signs of positivity and an indicator of the market's resilience, the short-term outlook is more uncertain.
Landlords exiting the BTL market
The private rental sector looks set to be rocked as landlords are looking to exit the BTL market. Due to the risk of higher mortgages and declining returns 44% of landlords are set to sell their investment properties, 45% will turn to alternative forms of investment and 53% are set to raise rents following the interest rate rise to 4.5%.
Further rate rises forecasted by experts, spell disaster for the UK's PRS with the existing rental shortage to be exacerbated.
The UK housing market is already facing a heavy shortage of rental properties, with over 4.4 million households in the PRS compared to 15.5 million in the owner-occupier market.
The increased pressure for landlords is not just financial, but the new Renters' Reform Bill landlords will also require compliance with new rules and regulations which will add further operational complexities. Barring any major policy changes from the government, this trend of landlords exiting the BTL market is likely to continue, leading to a further shortage of rental properties.
House price boom coming to an end
It appears that the era of significant increases in UK property prices may be nearing its conclusion, as population growth slows and working remotely becomes more commonplace, according to David Miles, senior economist from the Office of Budget Responsibility.
David Miles noted that house prices in the UK had risen faster than either incomes or rents in recent years but that the "age of massive rises of house prices may be nearing an end."
With households increasingly shifting towards working from home or a hybrid of WFH and the office, there could be a reassessment of the benefits of expensive city-centre locations and a move to more affordable suburban zones. This move would put downward pressure on prices in the short term, as more people are looking to move to these areas and there is a greater supply of housing here.
Overall, the outlook for the UK property market is complex with short-term difficulties, as further increases in interest rates are making it difficult for people to purchase a home.
Repossessions on the rise
Amid the sharply rising interest rates, repossessions have increased by 50% in the first quarter of 2023 - as 750 mortgage properties and 410 BTL properties were repossessed.
With 76,630 homeowner mortgages in arrears of 2.5% or more of the outstanding balance and the added pressure of the ongoing cost of living crisis, it appears that the recent increases in repossessions will not be a singular event.
Those at the highest risk of repossession will be low-income households and those already in arrears. BTL landlords – who were already facing increasing taxes, lower returns and decreasing yields – face a higher risk of repossession due to the new rate. The trend is expected to continue as thousands of landlords face fee raises, higher tax bills and difficulties refinancing loans at higher rates.
What's set to happen with interest rates?
The Bank of England base rate has been on the rise in recent months, reaching the current level of 4.5% and causing borrowing costs to increase. Predictions for the base rate fluctuate, with the peak projection increasing from 5% to 5.25% with inflation remaining high at 8.7%.
These interest rate increases have substantially impacted the housing market, with buyers being the first to feel the pinch. Rising base rates have caused mortgage rates to increase, thereby making them more expensive and leading to delays in the home buying and selling process. This has had a knock-on effect of causing chain breaks and further disruption in the market.
Whilst buyers and sellers are showing more confidence in the market now the dust has settled after the fallout following last September's mini-budget, the property market is at a tipping point. The impact of interest rates continuing to increase, BTL landlords looking to leave the market, sky-high rental prices impacting tenants, mortgage delays increasing, more house purchase chain breaks and repossessions on the rise, all point towards a rocky road ahead.
The recent (slight) drop in inflation may enable buyer confidence to slowly return, if interest rates continue to rise UK homeowners, buyers and renters are set for what's just been described by the head of Barclays as, “a huge income shock”.
Stephen Clark, from Finbri, comments: “There are murmurs in the market that the government's war on landlords has gone too far, and that the government may even rethink their upcoming legislative changes, such as the Renters' Reform bill.
“Even if that's true, our own survey laid bare how landlords would react to the base rate increasing to 4.5% and, subsequently, impacting their BTL mortgages and profits.
“Well, we're at that tipping point. Any climb down from the government may prove too little too late. Is the mass exodus from the market that landlords threatened near? We'll soon find out. Is the house price boom of the last decade truly over? One thing is certain, there's likely to be many more twists and turns in the property market before the year's out.”
