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Future interest rate rise could crash the market, warns analyst

A relatively modest interest rate rise could trigger a crash in the housing market according to the housing analyst behind the Home website.

Doug Shephard, director fo the site, says the current housing boom is at least partly built on high levels of borrowing and this risks financial calamity for many owners.

“In many other countries, including the US, interest rates are fixed for the term of the loan, typically 25 years. In the UK, however, half of outstanding mortgages have interest rates fixed for only two years or less” he writes in the latest housing market snapshot produced by the site. 


He continues: “Added to that, many of the newly introduced 95 per cent government-backed mortgages are also on short-term deals. Sounds risky? Indeed it is. Just a small rise in mortgage interest rates (say two per cent) from where they are now, coupled with higher living costs, would slam on the affordability brakes, while a bigger inflation-busting five per cent rise would likely crash the market.”

Shepherd suggests the current market boom is built on fragile foundations.

In the short term these are the stamp duty holiday deadline and, over the past 15 months of the pandemic, fear that house prices would drop. Over the longer term, high levels of borrowing - sometimes encouraged by government - has created what Shephard calls “the most blatantly fake property boom in history.”

He warns that supply chain disruption caused by the pandemic exists already - fuelled in some cases by the economic stimulus packages - and that this will soon filter down to basic living costs. 

“How will we be able to tame this inflation? The normal remedy, of course, is to raise interest rates but this would reveal a structural vulnerability in the UK economy which has become so dependent on the housing market” he warns.

In terms of the market today, Home says asking prices across England and Wales added a further 1.1 per cent in the past month while stock available to prospective buyers is now 25.8 per cent below the level of May 2020. 

“Monthly supply remains well below expectations in all regions except Greater London where urban flight has increased new listings by 35% compared to April 2019” states Home. 

You can see the full report here.

  • Andrew Ireland

    There is always money in peddling doom. The Government now control the property market, I would ask if it’s in their interests to see a crash? No I don’t think so.


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