A spike price of mortgage loans could trigger the UK property market to plummet, following the largest monthly drop in the cost of housing since 2008.
The market has been overheated where house prices saw an annual rise of more than 10 percent during the epidemic. Property prices dropped towards the end of 2022, however, asking prices surpassed expectations in January 2023, growing by 0.9% according to property site Rightmove.
Why are UK house prices so high?
The prices of houses are dropping from their record-breaking heights in the pandemic (more about this later). However, they remain quite high by historical standards and have been increasing much more quickly than wages.
The price of an average UK home has nearly tripled since the turn century. Prices have increased by more than 60% in the last ten years, according to Nationwide building society.
At first glance, it appears like the primary driver has been simple supply and demand: a shortage of housing stock and the high demand for homes.
While this is definitely an aspect, low interest rates had really been powering the housing market since the beginning of the epidemic. The ability to borrow low allows people to finance mortgages.
Yet since December 2021 the Bank of England has increased the base rate by ninefold from its record low of 0.1 percent. The base interest rate now sits at 3.5%.
This is in response to soaring inflation, which hit 10.7 percent from January from November.
A rise in mortgage rates has led to a higher cost to buy a house, and the housing market has begun to take an eagle’s strike, with prices falling for four months in the same time.
The next rate hike is expected in 2023, which will seriously impact the housing market since it will mean that mortgage payments will rise.
The rising cost of living is likely to be the biggest reason behind a slowdown in home prices. As budgets of households come under pressure, fewer can afford to purchase homes.
It’s believed that some first-time buyers will hold off in anticipation of what happens and whether it will influence the market.
Are house prices down?
House prices indicate that price growth is slowed and even reversing. This is because the demand from buyers is slowing as their living costs rise.
The property website Zoopla stated that the demand for housing had slowed by 50% during the 12 months to December 2022.
Below, we will outline the house cost estimates from two large lenders.
Halifax House price index
The most recent data from Halifax the largest UK mortgage provider, showed an 1.5 percentage decrease in prices in December. This marks the fourth month of dips in a row, and places the average UK house cost at PS281,272.
Prior to that , the price of homes had dropped 2.3 percent in November. This was the highest fall since the 2008 financial crisis.
However, the annual rate of growth slowed from 4.6 percent to 2%, a significant reduction from the June’s peak of 12.5 percent.
The lender, which is the UK’s largest mortgage provider – has declared it foolish to rule out significant price increases in the coming months.
Inflation and uncertainty over the extent to which costs of living increases influence household bills are impacting the market.
Average two-year fixed mortgage interest rate increased to 6.55 percent in October, however, this has cooled down to less than 6percent. Here’s more details on average mortgage rates and how they’ve changed.
This has seen households paying the greatest portion of their income on mortgage payments since 1989 , a time when the rate of inflation is running close to a high of 40 years.
Nationwide house price index
House prices grew by 2.8 percent from January to December, falling from annual growth of 4.4 percent, according to Nationwide Building Society.
The report also marks a 0.1 percentage monthly drop in house prices. This is the fourth monthly drop over a period of time. Prices for homes are now at PS262,068.
In November Nationwide reported the following: 1.4 percent drop. This was the highest since June 2020, which was the peak of the Covid pandemic.
“The market has definitely been affected by the turmoil that followed the mini-budget, which led to a significant increase in the interest rates of market participants,” said Robert Gardner, Nationwide’s chief economist.
“Higher cost of borrowing has added to the pressure on affordability for housing at a time when households’ finances are already under pressure from rising inflation.”
The rate change for mortgages reflects a higher base rate of interest – currently at 3.5 percent – which is imposed by the Bank of England as part of its efforts to combat the rising inflation rate, which is mainly caused by the fallout from Russia’s war in Ukraine.
However, it did mention a variety of reasons for price increases, such as the scarcity of new houses, a strong increase in wages, and cuts to stamp duty that were revealed in the mini-budget of the government.
Which are regional differences in the house price?
There are several regional variations in prices for homes as well as areas that are experiencing various levels of growth.
But, all countries and regions witnessed a rise in home prices annually in 2022, although the rate of growth has been slowed.
Nationwide , the price of homes was compared between December and October to the same timeframe in 2021:
East Anglia was the strongest region to perform in England with prices rising by 6.6 percent compared to the same three months in 2021
Scotland was the poorest-performing region, with house prices increase of 3.3 percent
Wales has seen a dramatic slowdown in growth, slowing to 4.5 percentage from 12.1% in the previous three months.
Northern Ireland saw prices increase by 5.5%, much weaker than the 12.1 per cent increase that was recorded in the last three months of 2021
Price growth for houses was second most sluggish in London. However, prices in the capital are still the highest across the UK at PS528,000, almost double the UK average
What is the difference in price between different types of property?
The pandemic has caused massive changes in home preferences, and mortgage lenders continue to see differences in price patterns between different kinds of properties.
Since the start of the epidemic, the cost of detached family homes are rising much faster than flats.
Many workers are continuing to work from home a handful of times per week, meaning there is a need for larger houses with room for a work space at home. The hybrid model of working continues, so too will the trend of larger buildings.
Figures of Nationwide Building Society show that the cost of
A detached property increased by 26%, equivalent to nearly PS78,000 cash terms, between 2020 through 2022. For 2022 only detached properties increased by 5.9%
Flats were up 13.4 per cent on average (PS23,000) between 2020 between 2020 and 2022. If we look at 2022, the cost of flats rose by 2.1%
Statistics from the Office for National Statistics show an unintentionally different trend with terraced and semi-detached houses rising in price the most. In the year to October 2022 show that the average cost of:
Detached houses reached PS468,376, an increase of 12% over the year
Semi-detached house prices hit PS287.383, an increase of 14%.
Terraced homes hit PS242,690, up 14%.
Flats reached PS235,237, with an uptick of 8.6%
Do you see a higher demand for rural locations?
Since working from home is likely to be a longer-lasting element of many people’s lives and the need for property in rural areas has increased.
Lockdowns underscored the value of greenery and space, which led to a rise in demand for properties in coastal and rural regions, as per ONS statistics.
The prices of homes in certain hotspots have risen at three times the national rate. These include areas such as:
Conwy located in North Wales
North Devon
Richmondshire within the Yorkshire Dales
Estate agents have reported a high level of demand for rural and remote properties in Scotland.
As a result, some people have been returning to commuter belts and cities that has increased the price of houses in these areas.
Are house prices set to plummet in 2023?
We can’t be 100% sure what the future holds recent spikes within the UK base interest rate have led to fears that the market could fall.
After the controversial September mini-budget numerous mortgage companies retracted deals and hiked rates, thereby increasing the cost of mortgages across the board.
Now that the Bank of England has raised the base rate of interest to 3.5%, these effects will likely be intensified. It is anticipated that this will reduce demand among potential buyers and result in house prices to fall.
There are other elements that can dampen the rapid growth witnessed in recent years, namely the crisis in cost of living. Prices for petrol and energy, rising inflation and tax increases mean that most households have less disposable income to buy homes.
While annual house price growth has been high across the board, home prices are sagging each month. If the demand slows and people hold smaller savings and a lower deposit, home price inflation could decrease further.
But that’s not to say property prices will go down because demand continues to outstrip supply across the UK.
In actual fact, the portal for property Rightmove has reported the publication of a 0.9 percent increase on asking prices in January, the biggest increase in the same time of year , since January of 2020. The mortgage rates are dropping which means that buyers are returning on the property market.
Demand will likely be able to cushion the blow, which means home prices may fall instead of crashing.
House price prediction
With the ongoing competition for space, many housing market predictions remain bullish. But the perfect combination of high inflation as well as rate hikes is expected to dampen the housing market.
Here are some predictions for what’s to come:
In January 2023, Halifax forecast that prices for homes would drop by around 8% over the course of the year. The Halifax forecast said that a drop of 8% could result in that the cost of a typical property would return to prices in April 2021 and are still higher than pre-pandemic levels.
In December 2022 Robert Gardner from Nationwide said that house prices could experience a modest drop in 2023 of about 5 percent. According to him, there needs to be a substantial decline in the employment market to trigger the double-digit drops that have been suggested by forecasters.
Lloyds Bank has forecast house prices to drop by 8% in 2023. It has put aside PS668 million to cover bad debtthat could result from borrowers struggling to meet their obligations.
The Office for Budget Responsibility has forecast that prices will decrease by 9 percent between 2022 and 2024, before rising again in 2025.
In November 2022, property website Zoopla stated that it was expecting prices to drop by 5% in 2023.
The Bank of England has predicted home prices to slow down later on this year, and mortgage lenders expecting to reduce loan amounts as the economy struggles
In July 2022, Wesley Davidson, founder of mortgage broker Fox Davidson, said he believed that the average UK home price would fall around 10% within 12 months
High inflation has caused interest rates to rise and it is likely to continue, which is slowing the market for housing.
Asking prices increased 0.9% in January 2023, taking the average price to P362,438, according to the website for property Rightmove. However, the number of buyers of homes has decreased by 36% from January the previous year.
Zoopla’s house price index revealed that sellers were pressured to reduce their asking price by an average of 4% to achieve an offer during the past few months. Surveyors are also reporting fewer enquiries from new buyers.
This will have a knock-on effect on the prices that houses are advertised for, since lower demand means that more buyers are able to bargain over the price of homes.
The slowdown so far has been modest however it is possible that it will pick up the pace swiftly as the interest rates continue to rise.
The positive news is that home buyers will now be able to save money in tax by taking advantage of the reduction in stamp tax rates.