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Higher interest rates will finally bring down house prices

Then final week, on the Conservative Party Conference, got here the revelation that the Government is giving up on massive components of its programme for reform of the planning system. Apparently, there’s going to be no constructing on greenfield land. This announcement was clearly directed at assuaging the ire of erstwhile Conservative voters in leafy constituencies. 

This could also be good politics – at the very least within the short-term – however it received’t make it any simpler to attain the Government’s goal of constructing 300,000 properties a year which was meant to include, if not scale back, the true price of housing. Keeping dwelling possession past the attain of a substantial a part of the inhabitants might be not good politics within the long-term.

Admittedly, if the Government’s programme of levelling up had been to work, then this could enhance demand in components of the nation the place there’s a appreciable quantity of under-used stock and scope for extra growth, whereas relieving the strain of demand within the South East. But will levelling up work? And even when it does, that is absolutely the work of a long time.

There is one thing on the horizon, nevertheless, that would ship a critical blow to present housing market optimism, particularly increased interest rates. And it appears that evidently increased rates are coming a lot earlier than virtually anybody anticipated. No one expects a return to the peaks of the Seventies and 80s, when the Bank Rate was usually in double figures and at one level reached 17pc.

Indeed, it appears unlikely that Bank Rate will get any increased than 2pc or so over the subsequent couple of years. However, towards the present rate of 0.1pc, even 2pc would characterize a big enhance. Mortgage rates are at the moment about 2pc. If official rates rose by 2 proportion factors, then mortgage rates would in all probability rise to 3pc or maybe extra.

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