What will happen to York property values now that interest rates have risen?

The average value of a property in York currently stands at £241,318 and of the articles I’ve written recently, at the time of writing, interest rates were 0.5%. So, with the increase in the Bank of England base rate recently to 0.75%, what impact will this have on property prices?

Higher interest rates ahead.jpg
To explain, we need to look way back to the mid-1970’s when property prices in Yorkshire, according to the UK Housing Review was £9,058.  However, since 1975, we have experienced in the UK, inflation of 807.5%.

Back in 1975, the average salary was £2,291 and average car was £1,840. A loaf of bread was 16p, milk was 28p a pint and a 2lb bag of sugar was 30p. Inflation has increased prices so comparing like for like, we need to change these prices into today’s money. In real spending power terms, an average value of a York house in 1975, expressed in terms of today’s prices is just over £73,000.

Pound coin
This means in real terms, property costs a lot more today, than in the mid 1970’s, but has it always been that way?  The graph below shows how property prices have fared in relation to interest rates over the last 40 odd years, where the white declining line represents inflation and the increasing blue filled out line represents York property prices.

Whilst there is an argument to say that when the base rate was high (circa 14%) property prices were significantly lower than they are today and where the base rate is at an all-time low, property prices are far greater than they’ve ever been. This made me question, is there a link between property prices, inflation and other external influences such as interest rates? After all, an increasing base rate will result in mortgage lenders increasing their rates meaning increasing cost of living.

Price vs int rate

Before we look into the correlation in further detail, it’s worth remembering that in the 80’s and early 90’s, the inflation rate was determined by the Government whereas now it is the Bank of England Monetary Policy Committee who holds this responsibility.

Whilst there is a correlation in a fall in interest rates as well as property prices in 2008/2009, this was down to the credit crunch and global recession rather than a direct consequence of one another. Interest rates are not the only factor affecting property prices. It is also possible that when interest rates continue to rise in the future, it is just as possible that property values will continue to rise also (look back at the early to mid-noughties).

Let’s also bear in mind the level of competition in the mortgage market as well (especially in the buy to let sector) which wouldn’t have been as prevalent 30-40 years ago. With this level of competition, any lender who increases their lending rate will be undercut by their rivals with far more preferential rates.

House %
I wrote in a previous article that York property prices are determined mainly by supply and demand, sentiment in the market and availability of finance. Whilst interest rates may have an impact on property values, I do not believe that an increase of 0.25% will shake the market enough to cause a ‘race to the bottom’. After all, the population still need a rooves over their heads and with an ever-increasing population and a limited supply of housing stock and from my experience, the York housing market being stronger than ever from a rentals and sales perspective, I believe the market is going to continue to grow at least for the foreseeable future.

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