Written by Kunal Sawhney, CEO, Kalkine

When UK households are struggling with the severest cost of living crisis, inflation and house prices are going in tandem in the country. The latest report of Rightmove has revealed that house prices in the UK have surged by a record £55,000 since the pandemic began, and there is no sign of stopping down.

House prices continue to move higher amid a lack of supply, with the average asking price of a property entering the market hitting a fourth consecutive record in May. Rightmove analysis has reported a rise of 2.1% in the asking price from the previous month to £367,501.

The real reason for the surge in housing prices in the UK is the supply-demand mismatch. When compared with the level of 2019, the number of properties available in the market has seen a decline of 55 per cent. That is keeping the housing prices in the opposite direction to the economic growth. Those equity-rich buyers who can afford it are going ahead and re-evaluating their lives and priorities with new living spaces.

Is housing price rise a bubble?

House prices have been on a bull ride for the last two years, but they cannot continue to defy gravity forever. As the economy is all set to slow down, house prices are likely to see a similar reaction. The persistent rise in house prices in the last two years has already created a big hurdle for first-time buyers. The interest rates till now have seen four consecutive hikes from the Bank of England (BoE) and are likely to see a few more hikes by the year-end.

If we go by the latest report, while the average asking price of houses is on the rise, there has been a decline of 14 per cent in the number of buyers contacting estate agents. Though the numbers may still be higher than the 2019 levels, signs of a cooldown have started appearing in the market. Still, it will be far too early to say that it’s a bubble and there is going to be a crash in the housing market.

Will a further hike in interest rate impact the housing market growth?

The biggest factor that can contribute to the slowdown or halt in the housing price rise is a sharp rise in mortgage rates. BoE has raised the base rates to 1 per cent, and there are some market analysts who predict the interest rates to go as high as 3 per cent by next year if the inflation remains at the elevated levels. However, there are others who believe that the base rates may not go beyond 2 per cent. Central banks have very limited tools to tame inflation; either they can raise the base rates and make the borrowing more expensive, or they can suck the excess liquidity from the economy through quantitative tightening. Interest rates are already at a historical high, and quantitative tightening may not be on the central bank’s horizon. There is another factor that can impact housing prices is unemployment. If there is an unexpected rise in unemployment, then the house prices could be under pressure; however, only a modest increase is currently being predicted in the near term.

To sum up, it can be said that though housing demand may have shown some signs of cooling down from the unexpectedly high levels, there is still plenty of momentum existing within the housing market. The number of buyers has not seen a drastic decline, while the buyers inquiring about houses is still significantly higher compared to the pre-pandemic period. Supply remains skewed and people’s quest to move out of apartments in cities to larger houses on the countryside will keep the momentum going for the housing market.