Anna Williamson has been hunting for a flat in London since January. In that time, average rates for new mortgages have jumped multiple times, each limiting the pool of what she can buy. Grace and Howard are anxiously waiting to see how much further the cost of borrowing will have risen by September, when they have to renegotiate the mortgage on a flat they bought last year. Mary is hoping to complete her purchase as soon as possible, after bringing forward her decision to buy in the hope of beating ever-rising costs.

Talk to people on the ground and it’s quickly apparent that England’s housing market is in a state of flux. The Bank of England has increased the base interest rate half a dozen times since December last year — most recently by 0.5 percentage points in early August, the biggest single increase in 27 years — as it tries to stem spiralling inflation. Homebuyers are scrambling to respond to rising costs: some are accelerating moves, others are abandoning them.

The result, analysts say, is that the UK housing market may be at a turning point, ending a near decade-long cycle of rising prices. “We’re certainly entering a different period,” says Noble Francis, economics director of the Construction Products Association. “Interest rates are not going to go back down to 0.25 per cent, let alone 0.1 per cent: we’re going to have to get used to higher rates.”

The Bank of England is also beginning to unwind quantitative easing, its massive bond-buying programme undertaken to prop up the economy in the wake of the 2008 financial crisis. Ultra-low rates and quantitative easing helped to lift the economy out of its post-financial crisis malaise but have stoked house prices to increasingly unaffordable levels, Francis says.

The property market frenzy

House price rises have only accelerated in the past two years, as the pandemic and the government’s stamp duty holiday triggered a flurry of moves and ran down the supply of larger homes with gardens that could better cater for homeworking. Would-be buyers routinely talk about being outbid, with properties going for way over the asking price in some cases.

Martin, an engineer, and his partner Louise, a civil servant, started looking to upsize in Cambridge this year because, with prices rising so quickly, they were worried they could not afford to wait. “We started looking and estate agents told us we would have to sell before we could even start viewing,” says Martin. “Houses on for £750,000 were selling for £925,000.”

Williamson is waiting to get her mortgage approved so she can move ahead with buying a house in Teddington, south-west London. Because her original lender had “a nuts backlog” of demand, she looked elsewhere. “But in the space of two weeks, as we moved mortgages, [the rate] went up from 2.2 per cent to 3.4 per cent,” she says. Williamson and her partner are able to press on at that rate, and are trying to do so fast to avoid facing even higher costs.

Because they want the flexibility to move prices up in line with interest rates and to “protect their service levels”, lenders are wary of offering the lowest rates in the market and being “inundated with customers”, according to Andrew Montlake, managing director of mortgage broker Coreco.

That is encouraging them to increase rates, and stoking a sense of panic among buyers. “It’s crazy, it really is. If we lose this house, what we could buy next would look totally different: further out of London, towards Guildford [in Surrey],” says Williamson.

Millions face rising bills

In addition to the higher borrowing costs, buyers are increasingly contending with the cost of living crisis and a deteriorating economy. Energy bills for the typical British household are forecast to hit £4,420 a year by April next year, more than triple their level at the start of this year.

“I think we probably are at a turning point now,” says Neal Hudson, a housing market analyst and founder of consultancy BuiltPlace. “The average [mortgage] rate for new purchases and remortgages has overtaken the rate on outstanding mortgages — the first time since 2013 that has happened,” he says. “For the past nine years it’s been cheaper every time that you have moved or remortgaged. Now that situation is reversing. That’s a big thing: historically, that coincides with moments where the market is much slower.”

Roughly 80 per cent of mortgage borrowers in the UK are on a fixed rate, meaning they have locked in a monthly repayment for a set duration, often two or five years. This group will be insulated from rate rises for the length of their term but could then have to confront a leap in borrowing costs. According to industry body UK Finance, 1.3mn fixed-term mortgages are due to expire this year and a further 1.8mn will expire next year.

As those mortgage deadlines roll through, they will force homeowners to confront tough decisions.

Grace and Howard, who chose not to give their real names, took out a mortgage on their two-bedroom flat in Clapton, east London, in January 2021 and currently repay £1,691 a month. At today’s mortgage rates, the couple estimate their costs would rise by £200-£500 a month. But they can’t remortgage until September and face an agonising wait to see how high rates will have climbed by then.

Less than a year ago, rates for both two and five-year fixed mortgages were as low as 1 per cent. Now many are between 3 and 4 per cent. For borrowers, that means monthly costs rising by potentially hundreds of pounds.

Already, higher rates are forcing some homeowners to sell up. Sarah and her brother Dom, who also declined to give their real names, co-own a flat in west London which they rent out. They have a variable-rate mortgage, meaning their monthly repayment rate closely tracks the Bank of England’s base rate decisions.

Thanks to rate rises, the cost of servicing the mortgage has “gone up massively so it’s not really worth renting out anymore. We’re in the process of selling up,” says Sarah.

Will house prices crash?

The Bank of England delivered a miserable prognosis earlier this month, warning that inflation could rise above 13 per cent before the end of the year, and forecasting a recession to rival the downturn of the early 1990s — when the interest rate peaked at 14.875 per cent and house prices in south-east England fell 36 per cent.

At present, falls of that nature seem highly unlikely. Average UK house prices fell by 0.1 per cent between June and July, according to mortgage provider Halifax. While the drop is modest — and annual house price inflation is still close to 12 per cent — it is the first fall in a year and may mark an important change in direction.

While some homeowners will feel under pressure, experts suggest we won’t see a spike in distressed sales because the level of debt as a proportion of property values across the housing market is nowhere near where it was in the 1990s, or during the financial crisis, when the average UK house price fell 19 per cent in the 18 months from September 2007.

“I don’t think there are going to be big price falls,” says Richard Donnell, research head at property portal Zoopla. “In 2007, a third of all people [taking out mortgages] didn’t have to give their incomes to the banks. And nearly 20 per cent of people were on loan-to-value [ratios] above 90 per cent.” Today that figure is around 10 per cent and the riskiest lending, at 95 per cent loan-to-value ratios, has all but stopped.

Affordability stress tests introduced in the wake of the financial crisis have curbed reckless lending and the risk of a major collapse in prices, according to Donnell. But rising rates are expected to slow and eventually stop price rises. If interest rates hit 4 per cent — a level they are widely anticipated to reach in the coming months — property portal Zoopla says it would expect price growth to fall to zero.

As the economic situation deteriorates, though, there is the real prospect prices will fall.

“The signs of stress are not the same as they were in 2007, but the cost of living crisis and inflation would not have been factored into affordability measures when mortgages were written. And there’s a recession [forecast] later in the year,” says Hudson.

That will raise risk levels across the board but leave some more exposed than others. Landlords whose tenants are on the frontline of the cost of living crisis are one danger area. They will face higher mortgage payments and many are likely to try and pass those on to tenants. But with disposable incomes already being squeezed by rising inflation, the ability of some tenants to stump up is under threat. If rents rise, they could be forced from their homes; if they stay flat and landlords are unable to service their mortgages, they risk their homes being sold from underneath them.

Another at-risk group are the 1mn or so borrowers who, according to UK Finance, are on interest-only loans, either as part of or the whole of their mortgage. These borrowers only pay off the interest on the loan, meaning they are more directly exposed to interest rate rises. At this moment of heightened risk and uncertainty, the Bank of England has decided to remove a mortgage affordability test it introduced in 2014 to ensure buyers could cope with a 3 percentage point rise in interest rates.

The bank claims the test is superfluous and other measures still exist to keep a lid on risk. But, according to the bank’s own research, tens of thousands of borrowers each year take out smaller, less-risky mortgages as a result of the test.

Where does this leave buyers?

The past nine years of loose monetary policy, stricter controls from lenders and high levels of government support have resulted in a housing market that is less affordable than ever.

Nominal house prices have risen 63 per cent over the past nine years; wage growth has not kept pace. The result is that the ratio of average house prices to earnings has leapt from three or five times in the early 2000s to almost nine times in England and Wales, reaching as high as 13 times in London, according to the Office for National Statistics.

Thanks to rising prices and tighter regulation, the biggest hurdle for most buyers in the past decade has been raising a deposit. The government’s solution to that was the Help to Buy scheme, introduced in 2013. The scheme is designed to assist those struggling to build a large enough deposit to buy, with the government providing an equity loan equivalent to up to 20 per cent of the property’s value, or 40 per cent in London, leaving the buyer needing as little as 5 per cent of the value as a deposit. Around 400,000 have used the scheme, more than 80 per cent of them first-time buyers. But Help to Buy has been criticised for inflating prices of new-build properties and boosting profits of listed developers without addressing affordability concerns.

The scheme comes to an end early next year, meaning anyone hoping to use it is already likely to be hunting for their home. It has given many first-time buyers a path to ownership and led to the taxpayer investing more than £20bn in England’s housing market — a position which makes it harder for the government to take a neutral view on falling house prices.

While it may sound appealing, a large drop in house prices may not immediately help first-time buyers as it usually coincides with tighter lending conditions. In 2006, before the last crash, there were, on average, 33,403 mortgaged first-time buyer purchases per month, according to UK Finance. That fell to 16,163 in 2009. No month recorded more than 30,000 again until the end of 2014.

For those locked out, there is little respite to be found in the rental market. According to Zoopla, it has been cheaper on a monthly basis to own rather than rent since 2009. But high deposit requirements and the Bank of England’s stress test have prevented many from buying.

With rents higher than mortgage repayment rates, the rental market is a hard place to save for a deposit — one reason that Savills expects the Bank of Mum and Dad to fund almost half of all first-time buyer purchases over the next three years. And there are signs that some landlords have recently been pushing up rents fast, making saving for a deposit even more challenging.

In Cambridge, Martin and his partner have found the market less frantic as rising rates have thinned competition. “An asking price offer now puts you in contention, rather than being a starting point for a bidding war,” he says.

He and his partner have put in an offer on a three-bedroom home despite acknowledging that “it feels like prices might go down”. He is confident that demand for homes in the city will put a floor on any price falls, but his mood is as much resigned as sanguine.

“Look at the counterfactual,” he says: “If you decide to rent somewhere nice, well that’s not great either.”

George Hammond is the FT’s property correspondent

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