Jeremy Hunt’s Autumn Budget outlined the Government’s new economic direction intended to plug the UK’s £55 billion fiscal hole. “Stability, growth and public services” was his hendiatris of choice, and while the Chancellor did not ignore housing policy completely — he came close.
Homeowners, buyers and renters facing soaring bills, scarcity of lending and higher taxes will have found little comfort in the latest fiscal plan from the Treasury beyond a sense of stability, compared to the freewheeling turbulence unleashed by the Kwarteng-Truss mini-Budget a mere eight weeks ago.
“On the face of it, the Chancellor appears to have done very little to compromise the property market and number of transactions, which is good news,” says north London estate agent Jeremy Leaf.
“Of course, there will be less money in people’s pockets when it comes to buying property and worries about rising interest rates will remain.”
Rising costs and record inflation are combining to drive historic falls in real household income (7.1 per cent over the next two years), making households worse off, said the Office of Budget Responsibility (OBR) today.
Mr Hunt also announced that Government support for soaring energy bills will be cut from next spring. This toxic mixture will make it significantly harder to save for a deposit, or afford a mortgage.
The first-time buyer outlook
Shadow Chancellor Rachel Reeves said the Budget would affect “people’s ability to pay the mortgage, their ability to pay the rent, their ability to pay the bills.
“The prospect of home ownership [is] becoming more and more remote.”
Nicholas Mendes of John Charcol mortgage brokers, said: “Many buyers are fairly worried about where mortgage rates are today - some are pushing back, reducing the amount they’re going to borrow or looking further afield - but also about the deposits themselves.”
“Today’s stamp duty announcement was pretty mundane and, while cuts help a few clients, someone who is going to buy at the top-end of the first-time buyer threshold (£625,000) often still needs a large mortgage.”
“First-time buyers are certainly putting plans on hold until the new year, mindful of a potential dip in property prices, in the hope that a deposit will stretch further if they have managed to save one.”
In places like London where demand is still very strong, there is often a conversation to be had over whether you should delay a house purchase if it means longer paying very high rent, added Mr Mendes.
Will London borrowers be able to afford their mortgage?
After Mr Kwarteng’s disastrous mini Budget sent the market into free fall 1,300 mortgages were removed from the market in the first five days alone as lenders grappled with economic uncertainty.
In November, the Bank of England’s eighth interest rate increase in a year pushed interest rates to three per cent, immediately adding around £115 to the monthly cost of a typical London mortgage.
Worried buyers pressed pause on purchases while sellers cut their asking prices in a bid to secure sales, causing house prices in London and the UK to soften. The average cost of a London home dipped 0.6 per cent to £544,000 in the month to September.
There are some signs that the change at the top of Government has calmed the markets. Although the base rate is expected to keep rising, gilt yields - the cost of Britain’s borrowing - should steady or fall, which should allow for greater economic stability and some cheaper mortgage rates to be reintroduced to the market.
“HSBC is one of several lenders cutting fixed-rate mortgages this week, and there is now some choice of five-year fixes at sub-five per cent,” said Mark Harris of mortgage broker SPF Private Clients.
John Charcol’s Mr Mendes said that more lenders would start to offer fixed rate mortgage at lower rates but this would be a gradual process to avoid leaving themselves overexposed to risk.
“At the moment, I’d suggest looking at alternatives like mortgages without exit fees, so you can swap again in six or nine months, or even tracker mortgages which can be more cost effective. Variable mortgage rates are still around one per cent below fixed rates at the moment.
The number of London and commuter belt homeowners with mortgages on variable rates or fixed rates ending in 2023 is estimated to be over one million. Thousands of these borrowers bought at a time of historic low interest rates and are now facing significantly higher mortgage bills that could see their cost of living stretched to breaking point.
What’s going to happen to house prices?
The OBR forecast a nine per cent drop in house prices over the next two years, largely “driven by significantly higher mortgage rates as well as the wider economic downturn.”
The latest house price forecasts predict that this will be a “pause for breath” in London, rather than a crash.
“We may see five per cent coming off prices...but that is in the context of 10 per cent price increases this year and 20 per cent over the past two years in some areas,” said Winkworth’s chief executive Dominic Agace.
“Demand in London is still very strong, and there is a lack of stock, so I’d imagine there will be a drop of three or four per cent then a quick rebound moving into 2024/2025,” said Mr Mendes.
Savills expects house prices in the capital to fall 12.5 per cent, with a recovery to begin in 2025, although the estate agents predicts London prices will still be 1.7 per cent below current levels in 2027.
Lucian Cook, head of residential research at Savills, said: “With the largest gap between incomes and house prices of any UK region in London and the South-East, buyers typically need to borrow more relative to income and need a bigger deposit to buy.
“As a result, we expect higher interest rates to hit buyers and prices in the mainstream markets of these areas hardest in 2023.”