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The housing market is set for disaster, and this shows why

·5-min read
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Analysts are downgrading their house price forecasts following “colossal” rises in mortgage costs. The value of homes will fall by 2pc in the last six months of this year as buyers become less able to pay their loans, according to Pantheon Macroeconomics, a research group.

The firm previously expected prices to be flat this year but became more pessimistic after mortgage rates reached levels not seen in years.

Other experts feel similar. Andrew Wishart of Capital Economics consultants, said: “If you put all of the economic indicators together, it is quite striking. Everything is getting worse at the same time.”

The Centre for Economics and Business Research, a think tank, has also downgraded where it thinks house prices will end up. In May, it expected a price drop of 2.9pc in 2023 but has upped that to 3.4pc. The worst of the decline will be concentrated between April and June next year, when values will fall by 5.8pc.

However, by some accounts, these are increasingly optimistic views. Several indicators suggest house prices could fall by as much as 20pc. So how extreme will the downturn really be?

History is not on homeowners' side

The average rate for a two-year fixed rate mortgage has surged from 1.53pc in November to 2.63pc in May – the largest six-month increase in nearly 20 years. Repayment rates will hit 3.2pc in July, Pantheon predicts, meaning the average borrower pays an extra £3,600 per year.

Salaries are not rising at the same rate. In the 20 years before the pandemic began, homeowners only needed to spend 18.5pc of a joint income on mortgage repayments. However, this will rise to 23.3pc next month.

This sharp increase will only get worse as mortgage rates rise at the fastest pace in nearly two decades. The chart above shows the proportionate relationship between changes in mortgage rates and changes in house price growth. Based on the historical relationship, the forecast increase in mortgage rates would trigger a 20pc fall in house prices.

However, this should not be as catastrophic as it seems, as homeowners have become much more willing to spend a greater share of their income on mortgages, Pantheon Macro said.

'We won't sell any homes'

Capital Economics said it expected house price falls to be quicker than during previous market downturns.

Estate agents are expecting significantly fewer sales this year, according to a survey from the Royal Institution of Chartered Surveyors, a professional body. Their three-month sales expectations have fallen at the quickest rate in the four months since and faster than at the start of the downturn in 2007 and 2008.

Sales expectations fell 11 percentage points during the financial crisis, according to Capital Economics, but the drop this time around has been 19 points. The current downturn is happening much more quickly and house price declines are likely to hit the market sooner than the last severe housing market collapse.

Buyer demand is falling

Rising mortgage rates have already quashed demand from buyers. Respondents to the Rics industry said there had the number of inquiries from buyers had fallen in May.

This was the first time demand has fallen since the end of the stamp duty holiday – when the drop was temporary. Analysts expect a much more prolonged decline in demand as interest rates continue to rise. This will put an inevitable brake on house prices.

The last time demand fell for a prolonged period of time, between May 2017 and November 2019, annual house price growth never rose above 3.2pc, according to Nationwide, a building society.

It's 2008 all over again

House prices' biggest weakness is that the property boom witnessed since 2020 was not all that it seems. Transactions may have surged, but moving house has got harder. In 2006, the average homeowner moved house every 13 years, according to analysis by property website Zoopla. So far this year, the average time between moves was 21 years.

This is the highest level on record in Zoopla’s dataset, which goes back to 1959, if you exclude the flash point during the 2020 housing market shut down and the surge between 2008 and 2013, just after the banking system's near collapse.

The figures emphasise the strain fast-growing house prices have put on ordinary households. Rising values have made it both harder to be a first-time buyer and harder for existing homeowners to upgrade. The gap between the average first-time and second-step home has become significantly wider.

Moving costs have also increased as properties were pushed into higher stamp duty bands. In the year to April, there was a 47pc increase in stamp duty bills, an extra £1,587 per home mover, entirely down to inflated house prices.

Lower-income buyers are already struggling. The last time the gap between first and second homes was so great was during another period of economic stress, following 2008. Although this time, the British economy is not grappling with a global financial crisis – that is likely still to come. CEBR has forecast the UK will enter a recession this year.

This will bring more risks for the housing market, which has been underpinned by extremely high levels of employment.

And then there's the cost of living crisis

It is the lower end of the market that is driving the decline of the market. Average priced and cheaper properties have seen the biggest drops in competition as the cost of living crisis erodes people’s buying power.

The largest slowdown has come in properties worth between £250,000 and £500,000. The share of properties that attracted three or more offers fell to 36pc last month, down from 41pc in May 2021. For properties worth less than £250,000, the share fell from 40pc to 36pc.

The overall number of homes with three offers or more has now hit the lowest level since September 2021, falling some six percentage points to 35.5pc. Hamptons analysed data from Countrywide, Britain’s largest property group.

Rising prices and mortgage costs have hit first-time buyers’ ability to save and landlord buyer's potential profit calculations. David Fell, of Hamptons, said: "We have seen landlord purchases cool slightly over the last few months, after a relatively strong start to the year."

Even though rents are rising at a record pace, they are still being outpaced by the soaring cost of finance, he added. More increases will undoubtedly cool housing market activity, Mr Fell said.

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