Interest Rates and House Prices – What Does 2018 Have in Store?

Posted 15 January 2018 by Nick Parkhouse

Will interest rates rise in 2018? Will house prices increase? Our guide looks at all the expert predictions for 2018...

2017 was a year which saw the first rise in interest rates in a decade, cuts to Stamp Duty for first-time buyers, and slowing house prices.

But what is in store for 2018? Keep reading to see all the expert predictions for what is likely to happen to mortgage rates and house prices this year.

Mortgage rates set to rise again in 2018

The Bank of England’s decision to raise interest rates last November marked the first increase in rates in a decade. The move to raise the Base rate from 0.25% to 0.5% added around £22 to the monthly cost of the average mortgage and it may not be the last change we see in the next year.

The Bank took the step in an attempt to dampen rising inflation in the UK and its Inflation Report mapped out an expected path that showed rates at:

  • 0.7% at the end of 2018
  • 1% in 2019
  • 1% through 2020

Experts are agreed that rates are likely to rise again in the spring, but divided as to what might happen after that.

Alan Clarke, UK and eurozone economist at Scotiabank, predicts that the next rate rise will happen in May 2018. Ruth Gregory, UK economist at Capital Economics, agrees that there will be an increase in quarter two (between April and June) this year.

After that, Clarke expects the Base Rate to sit at 0.75% by the end of 2018, while Gregory thinks we’ll see an acceleration of rate rises to leave it at 1.25% by November 2018.

Ray Boulger of mortgage broker John Charcol predicts that the interest rate will go up by one quarter by the end of 2018, bringing it to 0.75%.

“There is likely to be one 0.25% bank rate increase in 2018, or possibly two, but as for several years much larger increases have been factored in to the mortgage affordability assessment, this should not put those who have obtained a mortgage recently under financial pressure,” he says.

While any rate rise is not expected to hugely impact borrowers’ ability to repay, a rise could make it harder for consumers to get the mortgage that they need.

Boulger explains: “An immediate impact of any bank rate increase is likely to be the maximum amount available to new borrowers.

“The financial policy committee mandates that lenders assess affordability in most cases on the basis of a 3% increase in the revert-to rate, normally a lender’s standard variable rate (SVR), and so any increase in the bank rate automatically reduces the maximum mortgage available unless lenders don’t pass on the increase in their SVR even if, as with November’s increase, the cost of fixed rate mortgages doesn’t increase.”

The Daily Telegraph reports that in the event of an interest rate rise, ‘the most severe effects are likely to be felt by first-time buyers, who already struggle to save large enough deposits to qualify for the best mortgage deals.’

House prices to slow over next few years?

Over recent months there has been plenty of evidence to suggest that house price growth is slowing. The Telegraph reports Rightmove data which shows price cuts on properties on the market are at their highest rate for five years, while personal finance expert Richard Evans believes that interest rate rises may also cut demand for homes.

He says: “As mortgages became less affordable, we could expect further pressure on house prices: could 2018 be the year in which that cycle turns too?”

Estate agent Savills predicts that in the next five years house prices will grow at half the rate of the past few years. It said it expected London and the South East to be particularly hard hit, predicting a 2% fall in London next year and just 0.5% growth in the South East.

The international property company also expects the number of transactions slow. Stamp Duty is blamed for much of this, as the tax paid by buyers has risen in line with the growth in house prices in recent years.

They also highlight a sluggish buy-to-let market as a factor contributing to a slowing property market. A three-percentage point surcharge on stamp duty for property investors, in addition to changes in the way they are taxed, is likely to push many ‘armchair landlords’ properties out of the market as well as deterring potential newcomers.

Halifax agree that house price growth is expected to remain low this year, and they predict rises of between 0 and 3%. This is down from an annual growth rate of 3.9% in the year to November 2017 and 6.5% the year before.

However, Douglas Cochrane, head of housing development at Lloyds Banking Group, thinks that prices could continue to rise thanks to the Budget decision to abolish Stamp Duty for first-time buyers.

He says: “I’ve talked a lot to would-be buyers who have said that this will bring their aspiration of homeownership forward as their deposit will now go further. We can’t forget, however, the Office for Budget Responsibility’s comment that, in the medium term, anything that stimulates demand without a corresponding increase in supply will put upward pressure on prices.”

As in 2017, underlying uncertainty could make for a difficult market.

Jake Russell, sales director of estate agency Russell Simpson, says: “Going into 2018 we’ll be looking for more of the same. Nothing has been resolved in 2017 that won’t again rear its head this year.

Brexit is still rumbling on, Stamp Duty remains a sticking point at the higher end of the market and every week there is a chance the Government could fold and yet another general election is called.”


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