No longer defying gravity

By October 14, 2022Financial Planning
Graphic of two business people holding trampoline to catch a falling building - UK Housing Market

The UK Housing Market has seemingly defied gravity over recent years, shrugging off the economic effects of Brexit and the Covid-19 pandemic. For those who have suggested previously that prices may have peaked, there have been a number of false dawns. However, recent market data, together with the higher costs of living and the impact of mortgage rate hikes, may well combine to finally curb house price inflation.

The latest Halifax House Price data, released on 7th October, showed that house prices decreased marginally in September, with a -0.1% month on month fall. Whilst not newsworthy on its’ own, perhaps of more interest was the news that the annualised rate of growth has now fallen in three successive months. Nationwide, who also publish monthly house price data, reported flat prices on the month and a further fall in the annualised rate.


Cost pressures

We are not surprised to see price growth slow, as the higher costs facing households begin to bite. Despite Government support which has capped the unit rates for Gas and Electricity domestic supplies for the next two years, household bills have still risen substantially from where they were earlier in the year. Food price inflation has also impacted on household budgets, and whilst petrol prices at the pump have fallen over recent weeks, they remain elevated from a year ago.

Whilst household outgoings have increased due to the cost of living, and caused some pain to household finances, the recent turmoil in the mortgage market is likely to have a bigger impact over coming months. Fixed mortgage rates have been climbing sharply since the UK mini-budget announcement on 23rd September, the result of which has seen the yields on Government Bonds (Gilts) rise sharply, as markets reacted negatively to the announcements. This led to Bank of England intervention to stabilise the Gilt market by temporarily buying Bonds. Given the uncertainty, mortgage lenders raced to pull fixed rate mortgage deals at record pace, with new deals being released at sharply higher rates, as the cost of securing funding has now increased.


Mortgage hikes

To put this in context, prior to the Chancellor’s speech, the average two-year fixed rate mortgage was priced at 4.74%, but has now risen to more than 6% at the time of writing, the highest level since 2008. In stark contrast, the average two-year fixed rate mortgage was just 2.34% at the end of 2021. In monetary terms, taking out a £200,000 repayment mortgage over 25 years in December 2021, at the average two-year fixed rate of 2.34%, would have resulted in monthly mortgage payments of £881 per month fixed for the first two years. The same repayment mortgage taken out with two-year fixed rates at 6%, would result in an increase in monthly payment to £1,289 per month for the first two years.

For those borrowers on fixed rate deals that are shortly coming to an end, the new rates on offer are likely to come as a shock. The higher rates will also affect first time buyers, who will find affordability stretched further. The effect on the mortgage market is highly likely to negate the Stamp Duty changes announced in the Mini-Budget, which increased the residential nil-rate band from £125,000 to £250,000 for all purchasers, and from £300,000 to £425,000 for first-time buyers. Without the turmoil in the mortgage market, the permanent reductions in Stamp Duty may well have continued to support prices.


The wider impact

With homeowners being hit from all sides, a sharp slowdown in the housing market is now highly likely. This may well have wider economic consequences, as perceived strength in the housing market is closely linked to consumer confidence. As homeowners see house prices rise, they generally feel better off and more confident to spend. The reverse is also true, and for some who are over-leveraged, some homeowners risk holding a larger mortgage than the value of their home.

Housing transactions may also slow, which will affect many sectors of the economy. Each Property transaction completed will provide business for Removals and Storage firms, Solicitors, Surveyors, Estate Agents, together with spending and renovations undertaken by new householders. This may also have a knock-on effect on unemployment. The Home Builders Federation suggest that over 11,500 jobs are supported by housing transactions alone.


Reasons to be positive?

For those remaining positive about house prices in the longer term, supply side constraints remain. The Office for National Statistics (ONS) forecast the number of households in the UK will increase by 1.6m over the next 10 years, whilst the current rate of house construction in the UK is running at levels that falls short of the amount of new homes that will be needed.

It has also been suggested that landlords who are not keen on selling up may well be looking to increase rents, which in turn could lead to renters looking to purchase, in particular if prices fall by an appreciable amount.


Where does this leave Property investors?

Buy-to-let landlords have enjoyed the benefits of rampant growth in house prices, together with rental income, over recent years. However, those who are leveraged with Buy-to-Let mortgages may begin to see a squeeze on rental margins, which landlords may not be able to pass on to tenants.

From a financial planning perspective, residential property assets remain a valid part of any sensible diversified investment approach. With house prices likely to come under pressure, the risk of holding residential property as an investment has increased. This is further justification for landlords to look closely at the returns they are achieving on their property investments, and consider whether they need to adjust their overall strategy.


If you would like to discuss the above further, then contact one of our experienced advisers here.


The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.