Can house prices continue to rise as rates rise and inflation bites?

House prices are one element of the UK economy that we could have done without emerging from the pandemic stronger than before.

The bizarre pandemic housing boom, fueled by a cocktail of cheap mortgages, itchy feet, a desire for more space and lower stamp duties, has sent house inflation soaring. real estate prices.

Britain’s biggest building society, Nationwide, revealed yesterday that, on its long-term index, house prices have risen 12.6% over the past year. This added £29,000 to the cost of an average home to bring it to £260,320.

The average home is 20% more expensive than it was in February 2020 when the pandemic started.

A dubious honour: House prices are now at an all-time high relative to wages, even surpassing the 2007 peak before the financial crisis

To put that into context, if you want to buy an average home, you’ll need to shell out an additional £44,183.

But head to some of the areas with high house prices in the UK and you could spend £100,000 or even £200,000 more on the same family home now than before lockdown became a thing .

This surge in real estate inflation may make people a little richer on paper, but that’s not a good thing.

Unless you’re planning on cashing in or downsizing — or you’re a buy-to-let investor — it just makes your life harder.

First-time buyers see house prices skyrocket far faster than they can save a down payment and movers find that even though they can sell for more, the price of the place bigger than they wish has increased further.

The winners here are the banks and building societies who can sell ever larger mortgages, often spread over much longer periods than in the past.

And the problem is compounded by the fact that not only have house prices jumped, but we’ve come from a bad place for that to happen.

When the pandemic hit, homes were almost as expensive relative to wages as they had ever been: Nationwide’s average home price-to-earnings ratio was 5.9 from a pre-crisis record of 6.4 in 2007.

Since the fall, the UK property market has achieved the dubious distinction of surpassing that: the house price to earnings ratio is now 6.6.

To put this in a longer term context, in the late 1980s the housing boom saw the house price to earnings ratio peak at 4.9.

“Wait, but interest rates were in the double digits back then. Look how cheap mortgages are now,” I hear our older readers shout.

That’s true, but house prices, even at this frenetic time in the real estate market, were far below wages.

The difference between affordability and average house wages between 1989 and today is nearly two additional average annual pre-tax wages.

How long can this continue? At what point do we reach the point where people just can’t keep paying more for their housing?

At many times over the past 18 months, it has been suggested that this runaway train will soon run out of steam.

The stamp duty holiday is over, the return to the offices has begun, the pandemic space race is surely almost over, but the boom is still not over.

Now, a new dark cloud threatens to rain down on the parade: the cost of living crisis triggered by soaring inflation – and the knowledge that Russia’s war in Ukraine will only make matters worse.

At the same time that this is happening, interest rates are rising faster than expected, which has pushed mortgage rates up from all-time lows.

Mortgages are, of course, still incredibly cheap.

Those same older readers I mentioned earlier find it amusing – and somewhat infuriating – when we talk about the cheapest five-year fixed rate “raised” from 0.91% to just 1.59%, but the costs are rising. .

And as we highlighted this week, banks and building societies are also beginning to factor the future effect of cost-of-living compression into affordability calculations.

All of this limits how much people can borrow, and if homebuyers can’t get ever larger mortgages, house price inflation will eventually be curbed.

The question then becomes, will banks begin to loosen lending criteria?

These are much tighter than during the boom of the 2000s, when high-interest mortgages with no repayment plan were expected to help drive up property prices.

I wouldn’t expect a return to those heady days of “would you like to borrow more” lending, but I also wouldn’t rule out some easing from well-funded banks and building societies in no rush to withdraw the party punch bowl.

However, this seems like a time to exercise a little individual caution.

For buyers, avoid overpaying for a property and be careful not to overpay for a home that you can’t add any value to.

For homeowners, if the end of a fixed rate mortgage is near, explore your options now and consider trying to get a new rate well in advance. (Read our advice on how to find a new mortgage here).

Interest rates are rising, life is becoming more and more expensive, and the house price graph cannot continue to climb skyward indefinitely.

Home prices had a mild pandemic jump at first, then soared, Nationwide figures show

Home prices had a mild pandemic jump at first, then soared, Nationwide figures show

The best mortgage rates and how to find them

Finding a mortgage can be confusing due to the wide range of offers on offer.

This is Money has partnered with independent mortgage broker L&C, to help you find the right home loan.

Our mortgage calculator can allow you to filter offers to see those that suit your home’s value and level of deposit.

You can also compare different fixed mortgage rate terms, from two-year fixed rates to five-year fixed rates and even ten-year fixed rates, with monthly and total costs shown.

Use the tool at the link below to compare the best deals, taking into account both fees and rates.

> Compare the best mortgage deals available now

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