Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

ANOTHER month, another sharp rise in house prices with average property values rising by 1.4% in March.

The Halifax reports today that the average home is now worth 11% more than a year ago.1 The March rise was the biggest in six months and means that prices have now risen for nine months in a row.

That property prices are rising, even by this amount, isn’t exactly news. That’s been the trend for decades, with only a few short intervals of falling prices - at the time of the credit crunch and financial crisis, for example. But what makes the current rises more noteworthy is that they come at a time when the fundamentals of the property market look weaker than they have for a very long time.

Interest rates are rising, which means that mortgage costs are rising as well. Not everyone who buys a house does so with a mortgage, of course. Around a third of property purchases are made entirely in cash, and a greater proportion will be bought using a high proportion of cash, meaning buyers are less sensitive to higher borrowing costs.

But that still leaves a large share of the overall demand for houses that is dependent on borrowing, including first-time buyers who are needed in the long term to keep the market afloat.

To show the effect of rising rates on borrowers, consider someone buying an averagely priced home last year. Their purchase price would have been around £283,000, and with a 10% deposit they would have borrowed £254,700. They could have secured a loan for an interest rate of around 3.5%, meaning monthly repayments of £1,275 over 25 years.

But that was when the Bank Rate - the rate set by the Bank of England that underpins many other commercial loan rates - was 0.1%. That rate has now risen to 0.75% and is forecast to hit 2% by the end of the year as the Bank combats higher inflation. If all of that rise is passed on in mortgage rates, an equivalent buyer would be facing monthly repayments of £1,549.

That squeeze on mortgage costs comes, of course, when they are also having to find hundreds or even thousands more each year for other essentials, like gas, electricity, fuel for the car and food.

That all points to a squeeze on house-buying demand that should, logically, knock prices back. As the Halifax noted today: “Buyers are ... dealing with the prospect of higher interest rates and a higher cost of living. With affordability metrics already extremely stretched, these factors should lead to a slowdown in house price inflation over the next year."

It may not be enough to trigger a genuine fall in prices, however. The one notable economic factor providing support for property prices right now is low unemployment. Wage rises are not keeping pace with inflation but people generally feel secure in their jobs, meaning they are still likely to be confident of making repayments, even if they are higher. They can cut back elsewhere if they need to.

For that to change might require a more pronounced, and painful, slowdown in the economy. If businesses begin to struggle amid a wider recession, buyers may be less willing to sign-up to higher mortgage repayments because they will feel confident of being employed in a year’s time.

Growth has held up so far but is forecast to weaken from here. If it happens, it will be a big test for house prices.


1 Halifax House Price Index, 7 April 2022

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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