(Bloomberg) --

Bank of England Chief Economist Huw Pill said higher interest rates may cool prices in the UK housing market but are unlikely to lead to a crash.

The central bank’s decision to raise borrowing costs at the quickest pace in 27 years yesterday is cutting in on the ability of buyers to afford mortgages. Pill, speaking in an interview with Bloomberg TV, said the BOE is attempting to bring down inflation, which may top 13% this year.

The BOE’s hikes are designed to curb demand in the economy, and that is “partially working through the housing market, which we would expect to cool,” Pill said. “We think there is some resilience there, and we’re not going to see the dramatic downturns we’ve seen in the past.”

There are already signs that the bank’s actions are starting to slow the runaway growth in property prices seen through the pandemic. The mortgage lender Halifax said earlier Friday that UK house prices fell for the first time in a year.

Property portal Rightmove estimated that this week’s increase in the BOE’s key rate to 1.75% will take monthly mortgage payments for first-time buyers to 40% of their incomes, a level not seen since 2012.

When asked about the impact on mortgages by the Sun newspaper after the hike, BOE Governor Andrew Bailey said, “its important to think about whether you will still be able to afford repayments if rates rise further.”


House prices fell 0.1% last month, the first drop since June 2021, leaving the average cost of a home at £293,221 ($356,100), Halifax said Friday. Values were still 11.8% higher than a year earlier, but the pace of increase is fading.

The slowdown is expected to mark the start of a material loss of momentum for the housing market, which boomed in the pandemic. Households across the income spectrum are now facing a brutal cost of living squeeze, with inflation set to hit more than 13% in the fall, and the strain is being made worse by sharply rising borrowing costs.

“Negligible monthly declines in house price growth will get steeper,” said Tom Bill, head of UK residential research at Knight Frank, a real-estate agent. “Mortgages have become noticeably more expensive in recent months, which will dampen demand as cheaper offers made earlier this year expire and people roll off fixed-rate deals.”

The hit to living standards is taking hold at a time when affordability for first-time buyers is more stretched than ever. A picture of a slowing market was also evident in recent figures from mortgage lender Nationwide Building Society, which showed prices barely rose last month. 

Higher borrowing costs are already having an impact, with BOE figures showing mortgage approvals -- an indicator of future activity -- fell further below their pre-pandemic levels in June.  

Still, the market is still generally seen to be stalling, not slumping, with prices being supported by a shortage of homes for sale and savings built up during lockdowns. 

“Some of the drivers of the buoyant market we’ve seen over recent years -- such as extra funds saved during the pandemic, fundamental changes in how people use their homes, and investment demand -- still remain evident,” said Russell Galley, managing director at Halifax. “The extremely short supply of homes for sale is also a significant long-term challenge but serves to underpin high property prices.”

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