What impact will rising interest rates have on the local property market?

Market Insight: May 2022

Demand for property across Wirral and Cheshire West has continued to rise in 2022 despite several challenges to the economy. The Bank of England began to raise interest rates back in December 2021 (0.1% to 0.25%) and there have since been three more increases; the most recent being to 1% in May 2022.

The cost of living has also risen quite steeply as a result of sharply increasing fuel and energy prices, while the demand for goods and services since COVID restrictions began to ease have placed additional pressures on cost. The rate of inflation has already increased by 9% this year in the UK.

Activity in the local property market has maintained a healthy balance between supply and demand since the pandemic began, despite an end to the Stamp Duty holiday back in September 2021. With an increase to the interest rate, which will affect mortgage lending going forward, what challenges may lie ahead for the property market?

Why are interest rates rising now?

The average listing price (on Rightmove) for property across Wirral and Cheshire West has seen a steady rise over the past few years, reaching a record £281,000 in April 2022. This average does not necessarily reflect the actual price of property bought – Land Registry sold price data is still lagging a few months behind – but acts as an indicator of where the local property market currently sits.

Average new instruction price for Wirral and West Cheshire post codes (Rightmove, 2020-22)

Despite the Stamp Duty holiday ending in September 2021, a move which should have reduced demand for property, transactions and prices have continued to rise. There are a number of reasons for this which include:

• Shortage of supply in housing market
• More savings accumulated throughout the pandemic
• Return of 5% mortgages
• Low interest rates

For many of these factors, there is little that can be done to control market activity. The Government are actively trying to build more housing to ease demand, however this is a much more long-term approach given the time required to increase stock levels using this method.

By increasing the interest rate, it should encourage more people to save rather than spend as the cost of borrowing money becomes more expensive. Many buyers, particularly first-time buyers, will require a mortgage to purchase their property.

The last time the interest rate in the UK rose to 1% was 2009, so this is certainly a move designed to take effect in the short-term and curtail consumer spending. Given that the rate of inflation has already reached 9% in 2022, and may increase further, a rise in interest rates should begin to counteract this.

What does this mean for the local property market?

Looking back over the past twelve months, Rightmove activity for Wirral and West Cheshire property has been relatively consistent. Since the pandemic began, stock levels have struggled to grow given the volume of sales being processed, however the number of new instructions have been greater than sales in each month so far this year.

Monthly volume of new instructions and sales agreed in Wirral and Cheshire West (Rightmove, 2021-22)

When new instructions exceed sales for a sustained period of time, it means that stock levels are beginning to rise in the market. While not worthy of concern for sellers; buyers should begin to notice some benefits:

• Less compromises – In a tight market, buyers can often feel they need to make significant compromises given the lack of other options. Will a more suitable property become available? Will it be affordable? Higher stock levels should mean more choice when viewing property.
• Less competition – When stock levels are low, but demand is high, there are more people looking at the same properties given the lack of alternatives. While demand may still be high currently, more stock should mean interest becomes distributed across multiple properties, giving you more chance of securing a sale.
• Better negotiation position – Buyers who have additional options can afford to walk away if the asking price becomes too high, while sellers may be prepared to negotiate on price if there are fewer interested parties ready to make an offer.

Looking at the data, the average listing price on Rightmove rose to £281,000 for Wirral and West Cheshire in April 2022, while the number of sales agreed dipped for the first time since December.

While it may be too early to know for sure, this may essentially be the ‘tipping point’ in the market where initial asking prices have become too high to maintain the level of interest from previous months.

This is where another increase in the interest rate becomes more critical as the cost of borrowing money continues to rise. If people begin to take advantage of this by saving money at a better interest rate, the wider economy will see a reduction in demand for goods and services. This is essentially the plan to prevent the rate of inflation continuing to grow so rapidly.

These changes, coupled with the rising stock levels locally, provide a positive outlook for the months ahead. There’s nothing to suggest property value will drop, just that the rate of increase in value should now begin to slow down. Rising stock levels will also improve the buying experience with more properties available to view.

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