DELAYED INTEREST RATES COULD CREATE A MINI STAMP DUTY HOLIDAY EFFECT
Tuesday March 15, 2022
The long-term outlook for house price growth is bleak, but one analyst has raised its near-term forecasts
A delay to interest rate rises could create a mini stamp duty holiday effect as buyers rush to lock in cheaper debt that will push up house prices in the next few months.
The additional spike in inflation caused by the ban on Russian fossil fuels and food exports from Ukraine has meant economists have cut back how far they think interest rates will rise this year.
They have argued that this could act as a short-term boon to the housing market, with some analysts forecasting higher house prices in the short term. The Centre for Economics and Business Research, a consultancy, has raised its house price forecast for 2022 from 3.3pc to 3.8pc.
Soaring inflation
Three weeks ago, analysts were forecasting a historic 0.5 percentage point jump in the Bank Rate this week.
Since then, the war in Ukraine has fired up inflation forecasts even higher. Back in January, the Bank of England forecast that inflation would peak at 7.25pc in April. Goldman Sachs, an investment bank, has now estimated it will hit 9.5pc in October.
Typically, higher inflation means more pressure for the Bank of England to raise interest rates. But this situation is different. Historically, instability deters the Bank of England from interest rate rises.
What will happen to interest rates?
In February, four members of the Bank of England’s Monetary Policy Committee meeting voted for a 0.5 percentage point increase in the Bank Rate, meaning many analysts considered this a likely option for the March MPC meeting, which will take place on Thursday.
But analysts now expect a smaller rate rise this month. Most have forecast a 0.25 percentage point increase, taking the Bank Rate to 0.75pc. This is the most likely outcome “by a large margin”, according to Pantheon Macroeconomics, a research consultancy.
But new stress in financial markets as a result of the war means that it is also possible that there could be no change in the Bank Rate.
Earlier this month, the Vix, an index of market volatility, hit 36.45, the highest level since January 2021, during the winter lockdown. Analysis by Pantheon found that the MPC has never raised the Bank Rate before when the Vix was this high.
The Vix has since stabilised to 30.64. This is lower than the 32.18 reading the day before the MPC opted to raise the Bank Rate in November 1997.
What will this mean for house prices short term?
Since Russia invaded Ukraine, the CEBR has raised its expectations of UK house price growth in 2022 from 3.3pc to 3.8pc.
The boost from potentially delayed interest rate rises will be felt most in London. Here, it raised its forecast from 2.1pc growth this year to 4.6pc.
This is because slower Bank Rate rises would keep mortgage deals lower for longer. Since interest rates started to rise, buyers have been racing to lock in cheap deals.
Chris Sykes, of mortgage broker Private Finance, said: “We have been seeing borrowers rush to secure rates for months now.” Some have been paying early repayment charges in order to lock in rates early, he added.
The effect of this clamour has been akin to the end of the stamp duty holiday. In February 2022, annual house price growth hit 12.6pc, according to Nationwide building society. This was the highest rate recorded since June 2021, when price growth hit 13.4pc, as buyers rushed to complete sales ahead of the tax holiday deadline. Excluding this June peak, the February growth rate was the highest since January 2005.
A smaller than initially anticipated interest rate rise, combined with larger longer-term inflationary pressures could further fire up the race to lock in cheaper mortgage deals in the short term.
* UK house prices surged 12.6pc year-on-year in February
* The average home costs £29,000 more than a year ago
