Despite repeatedly raising interest rates to combat inflation, the Bank of England has recently provided reassurance against higher interest rates which could have potentially catastrophic effects on the property market.

In June 2023, the Bank of England raised the UK’s base rate of interest by 0.5% to 5%. This is the highest base interest rate that the UK has seen since the 2008 financial crisis.

This is the 13th consecutive raise in interest rates enacted by the Bank of England as it battles to combat the rising rates of inflation that the UK has seen, which has caused prices of everything from energy to groceries to rise repeatedly.

Higher interest rates encourage people to save money rather than borrowing, which will mean many will spend less money overall. If spending across a large scale decreases, then it is likely that prices will grow at a slower rate or begin to fall again.

However, this has had some major effects on the property market, as interest rates on mortgages have risen dramatically in recent months. This has dissuaded many potential buyers from jumping onto the market, causing the number of sales and transactions to drop.

In July 2023, the average interest rate for a five-year fixed mortgage deal jumped above 6%, the highest interest rate since November. For those on a variable-rate mortgage, this is likely to be even higher.

Sky News are reporting nearly one million households are facing a raise in their mortgage payments of £500 a month or more by 2026, putting immense strain on the market.

It is expected that further inflation would continue to have a detrimental effect on the market, as mortgages would become more unaffordable for many buyers, causing sales and house prices to fall further than they already have.

Many properties would be put on the market as homeowners would be unable to keep up with the rising interest rates.

Allan Monks, a leading economist working for JP Morgan, put out a bold prediction that interest rates would rise as high as 7% in the near future due to an inability to stop the rate of inflation.

Naturally, such a reputable source reporting such a dire forecast has many worried about what the future holds. Housing experts have warned that a base interest rate that high would be ‘game over’ for the property market, with some predicting a crash as bad as the one that happened in 2008.

However, several financial and property experts have recently been quoted as saying there is no need to panic, reassuring against such drastic measures.

Professor Abhinay Muthoo, a fellow at the National Institute for Economic and Social Research, was quoted by The Independent as stating that there is ‘no need to panic’ as the UK is ‘not in a 2007-8 scenario’.

He believes that there will be a period of financial uncertainty before things improve, but that ‘nothing crazy like double digits’ would happen to mortgage interest rates.

Other experts quoted by The Independent believe that although ‘there would be massive consequences for the economy and the housing market’ should rates rise to 7% or higher, they do not believe that rates will need to rise that highly, and that a smaller raise to 6% or less would ‘quite reliably strip inflation out of the economy’.

With this in mind, it is likely that interest rates will rise further in 2023, but not to such extreme levels. While this may put added strain on the property market, predicting an all-out crash would be a far-out forecast.