Experts speak of a “ticking time bomb”: Because of rapidly rising interest rates for mortgages, property owners in Great Britain have to fear unaffordable costs. The Bank of England raised its key interest rate significantly from 4.5 to 5 percent on Thursday.
Economist Suren Thiru from the Institute of Chartered Accountants in England and Wales had previously said that the 13th increase in a row was inevitable in view of persistently high inflation. But such a move means higher payments for homeowners who have to service adjustable-rate mortgages.
In Great Britain, real estate is usually financed on a variable basis. On the other hand, loans with fixed interest rates of 10 or 15 years are common in Germany.
Highest level since 2008
The key interest rate in Great Britain is already at its highest level since the financial crisis of 2008. The tightening process from almost zero percent at the end of 2021 to 5 percent now is one of the toughest that the British economy has ever had to cope with. The background is the sharp increase in inflation, which is mainly due to the Russian war against Ukraine.
A rise in interest rates has concrete consequences. Mortgage repayments for an average household rescheduling would increase by £2,900 a year, according to the Resolution Foundation think tank. The increase will affect around 7.5 million households by 2026. The think tank Institute for Fiscal Studies (IFS) warned that rate hikes could cost 1.4 million mortgage holders at least a fifth of their disposable income. A YouGov survey for Stepchange debt relief found that almost half of mortgage holders are already struggling with loan obligations and bills.
Fewer younger people are buying their own home
The number of homeowners who have to service a mortgage has fallen from 40 percent to 30 percent since 1989. Older people have paid off their mortgages. In addition, fewer younger people buy their own home, and high costs prevent them from climbing the “real estate ladder”. However, the desire for property among Britons is still widespread. As a rule, renting is only for a limited number of years, also because tenants have significantly fewer rights compared to Germany.
Prominent consumer advocate Martin Lewis called for “hard or soft political pressure” on the banks. He has discussed with Prime Minister Rishi Sunak that banks are increasing their margins, Lewis told ITV: “That means they are increasing mortgage rates but not savings rates, so they make more money.” If key interest rates continue to rise for years – Resolution expects a rise to 6 percent by mid-2024 – many people would have to turn their finances upside down. “It’s going to be a nightmare,” Lewis said.
Labor Party on Tories: ‘economic vandalism’
However, consumers should not expect any extra help from the government. Sunak conceded that inflation was hitting families in particular. But he had already acted “decidedly”. Most recently, the conservative government referred to existing aid, for example with energy bills. The Prime Minister has promised to halve inflation. He argues that government intervention will only push consumer prices further. The opposition Labor Party, on the other hand, accuses the Tories of “economic vandalism”.
Owners are also concerned that house prices have recently fallen significantly. In April, a property cost on average £286,000. That was £7,000 less than the high in September 2022, according to the ONS statistics office.
German residential properties more stable in value
According to a study by the German Economic Institute (IW), real estate prices in Great Britain fluctuate much more than in Germany. “The German housing market is resilient to sudden fluctuations in value, conservative real estate financing with long fixed interest rates and high transaction costs calm the transaction market,” said IW real estate expert Michael Voigtländer.
German residential real estate is also more stable in value than in France and the Netherlands. However, the additional purchase costs for entry in the land register, broker and notary in Germany are considered high in an international comparison.
Especially in times of low interest rates up until last year, many Germans secured attractive long-term credit terms. This keeps the burden on borrowers low: According to analyzes by the specialist publisher Argetra, the number of foreclosures in Germany has been falling for years. Expert warnings of an increase in emergency sales have so far not come true.
With the sharp rise in interest rates on loans, real estate prices have also started to slide in Germany. In the final quarter of 2022, they fell by an average of 3.6 percent compared to the same period last year – according to the Federal Statistical Office, the sharpest decline in 16 years.
