UK Housing Market Shows Resilience Despite Interest Rate Hikes

The UK housing market has shown remarkable resilience in the face of interest rate hikes and economic shocks. Despite Bank Rate rising to 5.25% in 2023, house prices have increased by 11% since late 2021, outperforming inflation at 24%. Several factors contribute to this relative stability, including the popularity of fixed-rate mortgages, stricter lending standards after the global financial crisis, and a strong labour market supporting robust wage growth.

However, not all regions have fared equally well. London and the south have underperformed compared to other parts of the UK, with house prices in London now 6% below their peak in late 2022. Northern Ireland, on the other hand, has seen a 30% increase in house prices over the last five years, driven by relative affordability and limited supply.

The Bank of England's interest rate cuts have led to falling mortgage rates, but the recent war in Iran has caused markets to expect higher inflation and subsequent interest rates. As a result, banks have raised mortgage rates, with an estimated 5 million households set to refinance onto higher rates by the end of 2028.

Affordability has deteriorated despite house price-to-income ratios indicating improved affordability. However, when accounting for higher mortgage rates and rising building costs, housing becomes less affordable than previously thought. The government's pledge to build more new homes is a step towards addressing the UK's housing issues, but the current backdrop for housebuilding remains challenging.