UK house prices fell by 3.1pc on an annualised basis in the first quarter (Q1) of 2023 and an increase in interest rates have a dampening effect on the market.

Inflationary pressures

With inflation currently running at 8.7pc (CPI), this is well above the Bank of England's long-term target of 2pc. While the consumer price inflation rate appears to have peaked and is on a downward trend, more worrying for the Government and the Bank is core inflation. This measure excludes volatile costs such as food and energy, and is still trending upwards. It's jumped to 7.1pc in May, its highest rate since 1992.

On Thursday 22 June, the Bank of England announced a 0.50pc increase in its base rate from 4.50pc to 5.00pc in order to tackle stubbornly high inflation in the UK.

What's more, the U.S. investment bank JP Morgan is predicting that The Bank of England could, under some scenarios, be forced to increase interest rates to as high as 7pc, as it attempts to get inflation back under control.

JP Morgan Economist Allan Monks has said the risks of a hard landing for the UK economy are also rising:

'Persistent surprises have intensified the pressure on the BOE to deliver significant additional policy tightening, and we now look for a 5.75% terminal rate by November,'� Monks wrote in a note to clients dated June 30.

'We assume the BOE will pivot to a '�high-for-long' strategy with the intention of allowing the lags in transmission to finish off the job.'�

'This alone raises the risks of a hard landing next year, but we recognise that the policy rate required to control inflation is proving to be higher than most had expected,'� the economist added.

People faced with difficult choices

Following the latest hike in interest rates the Governor of the BOE (which is independent of the Treasury) Andrew Bailey, told the BBC that he is aware that people were 'having to make very difficult choices about what they buy, what they need for their '� lives, '�what I will say is, if we don't get inflation down, if it keeps going on, it gets worse, it really gets worse, and we'll have to put interest rates up more.'�

For those landlords owning their properties outright, and those on fixed rate mortgages (at least in the short term) these changes will have little effect, but they are highly concerning for those coming off fixed rates very soon, and for those on variable rates.

Hikes in mortgage rates

According to Moneyfacts Mortgage rates have doubled, with the average two-year fix now at 6.47pc compared with 3.25pc a year ago. Savers will benefit, but it will affect some landlords who will be forced into looking at rent increases just simply to stay solvent.

UK hit hardest

The house price fall appears to be hitting the UK harder than in much of Europe: according to the latest analysis by Knight Frank the average across the board 3.1pc decline compares with just a 1pc fall in Germany, and priced rises of 2.7pc rise in France, 1.1pc in Italy and 3.1pc in Spain, all recorded in the same period.

London mortgage broker Craig Fish MD of Lodestone told The Independent newspaper that if interest rates were to hit 7pc, the mortgage market would 'tank completely'�.

'There would be massive consequences for the economy and for the housing market,'� he said.

Mortgage borrowers are already concerned that we could soon be heading for a 6pc Bank Rate, but 7pc has not been factored in by most people, and as Mr Fish says. 'If you go to 7 per cent, we will see a lot of properties come onto the market and people will be forced to sell.'�

Tom Pugh, an economist at consultancy RSM, told The Independent thata base rate of 7 per cent '� which would be the highest level since 1998 '� would 'start to break things'� and he predicted house prices could fall by more than a fifth.

'Interest rates at 6 per cent would be enough to push the economy into a mild recession. But even a mild recession would quite reliably strip inflation out of the economy. So I don't think you need to go that extra percentage point to push the economy into a deeper recession,'� Mr Pugh said.

The financial markets have factored in an increase in the base rate to 6 per cent by the end of this year which heightens fears for the UK economy and household budgets, while this week saw the average five-year fixed-rate mortgage deal jump to above 6 per cent for the first time since last November. Mortgage holders have been warned that fixed-rate deals could easily jump to 7 per cent this summer.

Sharp increase in payments

Those borrowers coming to the end of their mortgage's fixed term will experience a sharp increase in their payments over the next 18 months to two years. But as lenders have tightened their lending criteria over recent years, there's been extensive use of fixed rate mortgages. It means that many will now avoid the pain, the worst increases in repayments to come. The impact of these increases should have less of an impact, less of a cliff edge, than in previous periods of rising rates.

More robust mortgage regulations were introduced back in 2014. Aapplicants were stress tested in order to mitigate their risks in a scenario such as we now face. The new rules stress-tested a borrowers' ability to afford the prevailing standard variable rate (SVR) plus three percent, unless they were fixing for a five years or more.

When the Government and The Bank of England imposed these restrictions after the financial crisis of 2008, many people thought they were excessively restricting and draconian in nature. However, hindsight shows there was some wisdom in saving some borrowers from themselves.

Nevertheless, not every landlord will escape the squeeze, they may find they are operating at a loss in the short term with their finances stretched to the limit. Those lucky enough to have the resources may have to use savings temporarily to bridge the gap if they are unable to increase rents to cover the shortfall.

The need to remortgage

For those landlords coming to the end of a fixed term mortgage, needing to remortgage, the general advice from the industry bodies is to scour the whole market to try to secure the best deal available that suits your needs '� this is where the tailored advice of a good mortgage broker comes in.

The good news for landlords is that rents in the prime rental markets have continued to rise though Q2, 2023, as there continues to be a general lack of good quality available rental stock. According to a recent Savills report, 'levels of rental growth for prime properties across the capital moderated to +6.7% in the year to the end of June, rents rose by a further 1.4% in the second quarter of this year. That means, on average, rental values of prime homes in the capital have risen by 16% since March 2020.'�

Outside of London, rental growth has picked up again in Q2, 2023 as rents rose by 2.5%. That brings annual rental growth to 5.3%, and almost 22% above where they were in March 2020, says the Savill's report.

Savills advice to landlords, given the backdrop of the imminent Renters Reform Bill (a law destined to end the Assured Shorthold Tenancy) awaiting its second reading in the House of Commons, landlords should try to align their rents with these market movements.

Despite the gloom, opportunities will arise

When prices fall, cash buyers have the advantage. But Savills has raised concerns that cash rich overseas buyers, taking advantage of Sterling's recent weakness, have been snapping up London properties at the expense of locals. It seems that over 70pc of 'prime central London'� properties sold so far in 2023 have been bought entirely in cash.

Frances McDonald, director of residential research at Savills, told The Guardian newspaper:

'The established prime markets most synonymous with equity rich buyers are holding up the strongest amid mortgage market turbulence.

'While London's prime market continues to perform more strongly than expected, the most recent interest rate rises are likely to squeeze buyer budgets and increase price sensitivity, particularly in the more domestic outer prime locations where more buyers are dependent on borrowing. Sellers will need to price pragmatically to align with prevailing buyer expectations.'�

Savills says there's 'a growing divergence between cash and equity rich buyers and other groups in their ability to transact, and between the very top end of the market and lower value segments'�.

Landlords expanding their portfolios

In spite of all the difficulties and the speculation about landlords' selling intentions in the UK property market with the advent of the Renters (Reform) Bill, a recent survey conducted by The Deposit Protection Service (DPS) indicates that a majority of those planning to purchase an additional investment property aim to do so within the next two years.

A poll of over 2,000 landlords by the DPS found that 10pc plan to expand their portfolio. Among this 10pc, 60pc of them said they could take action in the next two years. 21pc of those looking to buy within this time-frame were considering buying in areas away from where they live, while 70pc said they would be looking for a terraced house.

Despite the economic pressures that landlords are currently facing, some are looking to take advantage of the situation and many of them will be looking further afield where yields are higher.