Why inflation could bring down house prices

Bank of England governor Andrew Bailey recently apologised for rising prices and warned inflation could climb as high as 5%.

His concerns are genuine, but his figures might be optimistic. The level of inflation in the UK has already reached 4.2% in the 12 months to October, the highest rate in almost 10 years, according to figures released in mid-November by the Office for National Statistics, and some observers think this is just the beginning. Economists at Citi now expect the RPI measure of inflation to run at around 6% next year for months, and peak at 7.1% next May.

Inflation at this level will have a major impact on almost every aspect of finance, including the housing market.

At Continuum we are looking at just what that impact may be.

High inflation means an interest rate hike

The Bank of England is tasked with keeping inflation below the 2% mark. Obviously, the past 20 months, with Covid and the economic standstill of lockdown have meant that rebooting the economy has taken priority over keeping inflation under control.

Interest rates are the main control the bank uses to regulate the economy. To deal with the financial crisis, the Bank dropped rates to 0.5% by March 2009. In August 2016, and Brexit worries, rates went down to 0.25%, and with the covid crisis, they fell to 0.1%.

Now, with the recovery looking more assured, it might be time to look at interest rates hikes to try and stop the economy overheating, and get inflation under control.

They missed taking action in the first week in November, but Bank of England policymakers have been dropping increasingly heavy hints that they could raise interest rates before the end of the year, sending yields on two-year government bonds up to a two-year high. But what about the effects on mortgage lenders?

An interest rate hike means more expensive mortgages

Mortgages are of course linked to the Bank of England base rate – the rate at which the Bank will itself lend to other lenders. Any increase in base rate means an immediate surge in tracker mortgages – which are directly linked to the base rate, and variable rate mortgage will soon follow.

Those who have fixed their mortgage repayments will have some breathing space – their mortgage repayments will be fixed for up to ten years, depending on the deal they have arranged. A two-year fixed mortgage arranged in the past 12 months might be at a rate of around 1%. It could be up to 2% or more when the time came to renew.

But the real impact will be felt by those taking out a new mortgage. Markets expect a 0.5% climb in the interest rate on a new two-year fixed rate mortgage to 1.7% by the end of next year, a blow to households already under pressure from soaring living costs. An increase on this scale would add almost £50 a month to the cost of paying off a typical £200,000 mortgage.

More expensive mortgages means a housing market slowdown

It was thought that the Stamp duty land tax holiday was fuelling the housing market. The fact that the market still seems buoyant now that the holiday has ended suggests that the real factor is the low cost of borrowing. 

A sharp climb in borrowing costs would have a major impact on house price affordability. Those high prices that seem so affordable now will look much less so if the cost of borrowing increases. 

We may not be looking at a collapse in house prices, but any increase in interest rate could mean that homes are less affordable. The market could slow rapidly, and some buyers who have overstretched themselves could be in financial difficulty.

The prices of some houses which have become overly inflated could therefore be reduced – by pressures caused inflation.

What can you do to protect yourself?

Some of the very cheapest deals are already being taken off the market, but those currently available are the lowest we are likely to see for some time. 

  • If your fixed-rate deal is coming to an end in the next six months, you should look at your mortgage now.
  • If you are planning a move, you need to look very carefully at the figures

Whatever you circumstances you need the help of a mortgage expert to ensure that you have the very best deal on the market for your particular circumstances.  

At Continuum we can compare all the offers from the major lenders and from specialists, we have access to products that are never advertised, and are only available to advisors. It means, whatever happens to rates and house prices, you can rely on us for the deal you need now. 

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation, to specific mortgage product you should seek independent advice before embarking on any course of action.

Your home may be repossessed if you do not keep up repayments on your mortgage.


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