The value of your house was probably not your first thought when you heard about Russia’s invasion of Ukraine, but it is conceivable that President Putin’s actions will affect the price of bricks and mortar in the UK.
Yes, the luxury London market could be compromised by the potential seizure of Russian property assets and plutocrats leaving the capital. There are about 150,000 Russians living in the capital according to a report by estate agency Aston Chase. However, a glut of McMafia-style mansions is the least of our problems.
The effect of the conflict will be felt far beyond the stucco houses of Belgravia; it will affect all our daily lives from increases in the price of petrol on the forecourt to the interest rates charged on our mortgages.
An economic paper on the link between oil price peaks and house price crashes began circulating on social media the day before the invasion. The fact is that as the global price of oil, gas, diesel, aluminum, nickel, wood, wheat and even sunflower oil rise (it’s a little-known fact that Russia and Ukraine account for 80 per cent of the world’s sunflower seed exports) the cost of living will rise here.
Last week the mortgage broker London & Country sent out an email to customers telling them “long-term fixed rate deals are near record lows” — they are right: get them while you can. Whether the rates rise quickly or slowly, everyone is agreed the only way is up.
Martin Beck, the chief economic adviser to the EY Item forecasting group, rules out a rapid hike in interest rates: “Any chance that the MPC may have gone for a sharp, 50 basis points [0.5 percentage point] rise in the bank rate in March’s meeting is now looking very slim.”
“Of course, higher energy prices implies higher-for-longer inflation, but given the source of this (an external event which the MPC has no control over), I think they’ll be more concerned with the risks to the economy than risks to inflation. So mortgage rates will probably now rise more slowly than we were expecting.”
Karl Thompson, a property economist at the Centre for Economics and Business Research, agrees. “An imminent rate rise now seems a less likely prospect,” he says. “Such a postponement would slow the rise in mortgage rates and provide a marginal boost to house price growth over the coming quarters.”
In the short-term we can expect the property market to continue its upward trend, but high inflation will eventually force interest rates up which, coupled with squeezed household finances, will slow the housing market down by the end of the year and into 2023. Thompson had already forecast slight falls in house prices next year. This now looks even more certain.
“The outlook for real household incomes is now even grimmer, at least for the foreseeable future. That will impact demand for housing because fewer people will be able to afford to borrow the necessary amount they need to buy at higher mortgage rates,” Beck says.
House prices were already looking as if they would stagnate later this year, possibly deflating a little next year, now it looks inevitable as interest rates rise and affordability is squeezed by Putin’s war.