Return to 1990s for homeowners as inflation threatens rates pain
SOARING mortgage repayments will soon inflict the same pain on household budgets as in the early 1990s, according to estate agent Hamptons.
The house price boom and rising interest rates mean borrowers will soon be forced to pay the same proportion of income towards their mortgage as homeowners three decades ago. Then, the Bank Rate was nine times higher at more than 15pc.
However, the rapid house price growth in the wake of the pandemic means that households’ “pain threshold” for rate rises today is far lower than during the late 1970s and early 1990s, when borrowers last faced exceptionally high mortgage rates, the study found.
The Bank of England last week raised the Bank Rate for the fifth consecutive time in six months, to 1.25pc. Soaring inflation, which is now expected to hit 11pc this year, means further rate rises are in the pipeline. Capital Economics, a research consultancy, has forecast it to hit 3pc next year.
While these may sound small compared to previous peaks, which hit 17pc in 1979 and 14.9pc in 1989, the impact of rate rises will cause similar strain today because house price growth has been so out of kilter with wage rises.
If the Bank Rate rises to 3pc as forecast, homes will be as unaffordable as they were in 1991, when the Bank Rate was 10.88pc, according to Hamptons. At that time, high interest rates were one of the key factors behind the property market downturn that triggered house price falls for three and a half years.
House price growth means that homebuyers today must spend a much larger share of their income on their housing costs.
With the Bank Rate at 1.25pc, a firsttime buyer purchasing an average £297,524 home on a 25-year repayment mortgage spends 36pc of their monthly salary on their mortgage. If the Bank Rate rises to 3pc, this share will jump to 45pc – on a par with August 1991, when the Bank Rate was nearly quadruple what it is forecast to hit now. David Fell, of Hamptons, said: “As a crude rule of thumb, a rate rise of one percentage point today exerts about twice the pressure on mortgaged household finances as the same rate rise would a decade ago.
“The scale of house price growth and mortgage debt taken on by households means that fairly limited base rate rises by historical standards have the ability to add significant pressure on to household finances.”
Bank Rate rises today will also have a higher impact because buyers have become accustomed to ultra-low rates.
◆ The widening gap between wages and home values risks causing another financial crisis, as house prices continue to soar, economists have warned.
Prices will climb a further 8pc over 2022 and will be 26pc higher than prepandemic levels by 2024, according to EY Item Club, an economic forecaster.
Peter Arnold, of Ernst & Young, said: “The gap between house prices and income means more indebted households, leaving the economy vulnerable to another financial crisis. One of the risks of ever-increasing house prices is that people really stretch themselves, particularly first-time buyers.”