Higher interest rates will finally lower house prices

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Then last week at the Conservative Party conference came the revelation that the government is abandoning much of its planning system reform agenda. Apparently there will be no construction on virgin land. The announcement was clearly intended to appease the anger of former Conservative voters in green ridings.

This may be a good policy – at least in the short term – but it will not facilitate the achievement of the government’s goal of building 300,000 homes per year, which was to contain, if not reduce, the true cost of housing. Keeping homeownership beyond the reach of a significant portion of the population is probably not a good long-term policy.

Certainly, if the government’s upgrade program were to work, it would stimulate demand in parts of the country where there is a considerable amount of underutilized stocks and opportunities for further development, while relieving demand pressure in the market. South East. . But will the upgrade work? And even if it does, it is surely the work of decades.

There is something on the horizon, however, that could deal a serious blow to the current housing market optimism – higher interest rates. And it looks like the higher rates are coming a lot sooner than almost everyone expected. No one expects a return to the heights of the 1970s and 80s, when the discount rate was regularly in double digits and at one point hit 17pc.

Indeed, it seems unlikely that the discount rate will be more than about 2pc in the next two years. However, against the current rate of 0.1 pc, even 2 pc would represent a sharp increase. Mortgage rates are currently around 2pc. If official rates increased by 2 percentage points, mortgage rates would likely reach 3% or maybe more.


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