Record-low mortgage rates mean house prices are likely to keep rising

A massive mortgage price war between high street banks is likely to occur.

(Image credit: © Micah Green via Getty Images)

published 12 August 2021

The latest survey of estate agents and chartered surveyors shows that the folk who are closest to the sharp end of the housing market reckon that prices are going to keep going up.

Sales have dropped off a bit now that the stamp duty holiday is starting to be phased out, according to the Royal Institution of Chartered Surveyors. But they're still well above pre-Covid levels, and most of the respondents reckon prices will be higher over the next 12 months.

And looking at what's going on in the mortgage market, it's hard to disagree with them...

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What really drives house prices

House prices are booming across the globe. It's been a major economic side-effect of Covid-19. Firstly, working from home made lots of people want to move, both because their existing property was too small and also because their commute didn't matter as much any more.

Secondly, governments made much more effort than ever before to replace people's incomes, while central banks drove interest rates down and encouraged risk-taking.

So as soon as people were allowed to go house-hunting again, they went wild.

This – broadly speaking – is the story as it applies around the entire world. There are some individual wrinkles – here in the UK for example, the stamp duty cut was bound to bring some sales forward.

But the ending of that stamp duty holiday is in itself, not a reason to expect a drop in prices – only a drop in activity. (And potentially a brief one at that). Because the two fundamental drivers are still in place.

And now there's another one to contend with. A massive mortgage price war between the high street banks.

Physical supply and demand is an issue in the property market. Of course it is – that's basic economics. There are a lot of things on that side of the business that could be improved in order to increase housing availability and affordability.

But by far the biggest factor to my mind, is mortgage rates and availability. The physical supply of houses will always change more slowly than the amount of money which is available to spend on them. So if that money supply drops fast, you get a house price crash. And if it rises, prices go up.

It's easy to forget now, but house prices globally hit a brick wall as recently as 2018. Why? Because interest rates started to tick higher. That reduces the amount of money available to spend on houses.

However, right now, the amount of money available to spend on houses is going up. And it's going up fast.

What this means for buyers and investors

Mortgage rates are now dropping fast from already low levels. As Samuel Tombs of Pantheon Macroeconomics points out, the interest rate on a typical five-year fixed rate mortgage, assuming a 25% deposit, hit a post-Covid high of 2.05% in November last year.

By April this year, it was down to 1.72%. Last month, it hit a record low of 1.48%. Those with even bigger deposits (or equity) can now get a five-year fixed-rate mortgage for less than 1%. That's extraordinary - it's the first time it's ever happened. Meanwhile Halifax just launched a two-year fix at 0.83% – another record low.

Don't get me wrong. There's small print – arrangement fees tend to be high, so you need to be borrowing enough money to make it worthwhile. And, adds Pantheon, rates for those borrowing 85% or more of the property's value will still cost more than they did before Covid.

However, these rates "have also fallen quickly." Perhaps more importantly, the other side of the equation – savings for a deposit – have improved during Covid too. "Around 20% of people who have built up savings report that they plan to use a portion for a deposit on a property."

So the race to the bottom is going on in all areas of the mortgage market and there's plenty of demand too. Much as I'm not especially happy to say it, we're at the stage now where the housing bull market is somewhat detached from whatever the Bank of England does, because banks are now competing hard with one another.

In other words, rates are sliding because banks are trying to undercut one another and win business, not because the Bank of England rate is changing one way or the other.

If this continues – and it's not obvious to me why it should stop any time soon – then individuals will be both willing and able to pay more for properties. As a result, prices will keep going up.

Now, if you're a first-time buyer or you're buying a home to live in, there's no point in worrying about this. There are other factors to consider if you're buying a home.

If you're a property investor, then you'll understand the market better than me. Being a landlord has always struck me as a massive hassle. But if you can find a way to make it work given the less favourable tax regime, then I'd have to admit that I feel less negative about residential property investment than I have for a long time.

Though I'd still be very wary of the direction of political travel (big landlords are in favour – small private ones not so much).

Finally, if you're keener on shares than property, there's a point to note here. House price booms go hand-in-hand with consumer booms. People are starting to borrow money against their homes to spend again. That bodes well for the UK's ongoing recovery - it suggests it will have legs. So it's another reason to feel comfortable about hanging onto UK equities.

Oh and if you're interested in commercial property, make sure you read the latest issue of MoneyWeek magazine, out tomorrow. My colleague Cris takes an in-depth look at the best sectors and the best countries to invest in. Get your first six issues free here if you don't already subscribe.

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John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.