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How The UK Cost of Living Crisis Will Affect the Property Market

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How The UK Cost of Living Crisis Will Affect the Property Market
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Depending on what you read, there is talk that the UK property market boom might soon slow down, or at the very worst, be over. Rising inflation and the cost of living have squeezed household income which can contribute to a fall in property prices in the next year.

With the surge in property demand, prices have increased significantly, but how will the UK cost of living crisis affect the property market? We’re going to take a closer look.

How has the cost of living increased?

The cost of living has seen an increase in the cost of consumer goods, which has a knock-on effect throughout the supply chain. Not only this, but an increase in energy prices and petrol means the average household has less disposable income, and this impacts the amount the average person has to spend on a mortgage. 

According to the Commons library, consumer prices were 7% higher in March 2022 than in March 2021. 

Gas prices increased by 28% and electricity by 19%, which means that the cost of living has increased significantly. There is also military and humanitarian spending as a result of Russia’s invasion of Ukraine. This has had an impact on the world economy, particularly energy prices in the UK.

Why hasn’t the cost of living increase affected the property market yet? 

Low-income households are likely to suffer more from the cost of living increase because a larger proportion of their income is spent on energy and food. 

The increase has not affected the property market yet because demand continues to outgrow supply, even with the challenges of the pandemic. Following the easing of Covid restrictions, record-high prices have continued to increase. 

The stamp duty holiday was introduced and a rush of buyers completed deals before the tax break ended on the 31st March 2021.

A lack of new houses, combined with rising demand, has seen prices rise. The average house price recently increased by over £40,000 – more than two years previous. 

Still, many lenders have withdrawn discounted fixed rates and variable home loans so it is worth finding out what deals are available now if yours is ending soon. 

Mortgage prices are still relatively cheap, with many fixed mortgage rates rising to 1.59% – this is still comparatively low. 

Banks and lenders are starting to consider the future impact of the cost of living in their affordability calculations. This will likely limit the amount people can borrow.

The cost of credit will drive change

It is expected that consumer credit will rise significantly this year due to the rise in the cost of living. The bigger the credit and loans a household takes out, the smaller the mortgage they can apply for. This could be one contributing factor to the mortgage lending forecast which is slowing from 4.3% in 2021 to a rise of 3.8% this year. This is predicted to decrease again in 2023.

Stretched affordability and fluctuating interest and mortgage rates are contributing factors, as is the rise in the cost of living. 

Rising interest rates and a decrease in income are expected to reduce the demand for new homes, with knock-on effects from supply chain disruption and world events such as Russia’s invasion of Ukraine. 

Inflation is set to hit heights not seen for 40 years, and the cost of credit will be directly impacted as a result. 

When do you expect the market to slow down significantly?

Mortgage lending is still expected to rise over the next 2 to 3 years, although the rate of growth may slow. 

Slow market growth will likely be the result of rising interest rates, combined with the pressure of a rise in the cost of living, stretching households up and down the UK.

Still, the current market is the result of a rapid rise in demand with property prices reflecting this, averaging 12% higher in 12 months. This means it is difficult for first-time buyers to get on the property ladder.

House prices may already be slowing with the average property rising by 1.1% month by month, down from 1.5 this time last year. 

The property market is expected to continue to grow in the short term, but high inflation and the cost of living are expected to slow the market down by the end of 2022 and continue to do so into 2023. 

Increased pressure on household finances due to the cost of living crisis is the reason many experts are predicting the property market will start to slow soon.

Which areas will be most affected?

Some areas in the UK are likely to remain competitive when it comes to house prices, but growth is likely to be slow in London, even though average prices there will remain the highest in the UK. 

Wales continues to grow faster than most regions, and large properties are growing faster than flats and small houses. 

Due to the impact of the pandemic, there is a higher demand for rural properties as more people work from home. Commuter belt properties and outer city homes are in demand with green space and interest in coastal areas such as North Devon, Conwy in North Wales and Richmondshire drawing a lot of interest and growth. 

There are plenty of discouraging predictions ahead, with interest rates origins and the cost of living crisis a real threat to household budgets. Still, house growth will likely continue to rise in the short term, before slowing by the end of 2022. 

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