Market Comment | September 2022

What’s going to happen with house prices?

Whether you’re looking to upgrade, ready to sell, or just daydreaming, it’s important to keep an eye on the market so you’re in a strong position when you make your next move. With so many factors influencing the market at the moment, we thought it would be useful to break things down, and try to predict what the future holds for house prices in London and the surrounding area.

August began with news from the Bank of England raising interest rates by 0.5 percentage points to 1.75%, with the possibility of a further point rise to 2.25% in September floated by some economists. This is to tackle runaway inflation which is the result of unforeseen factors like the pandemic, the war in Ukraine and the ongoing energy crisis. This is the biggest increase in 27 years and will increase pressure on households already struggling with the cost of living. The Bank of England also announced in August that the UK is expected to fall into recession in the final three months of this year.

The continued increase in interest rates will affect the housing market, and will most likely appear in the form of a slowdown in growth. Mortgages will be heavily affected. UK Finance says about 21% of households are on a variable rate – either a tracker, or a standard variable rate. Those on fixed rate mortgages due to end this year or in 2023 will also be concerned about the potential increases. An analysis by L&C Mortgages, reported in The Guardian in August, found the average lowest two and five-year fixed rates were 3.46% and 3.5% respectively. This is up from 1.34% and 1.55% in January. In August, buyer demand in the housing market remained strong at 50% above the five-year average, and annual UK house price growth increased slightly in July to 11.0%, from 10.7% in June. Whether the state of the economy will put the brakes on the housing market remains to be seen, but it will undoubtedly have an effect.

"Annual UK house price growth increased slightly in July to 11.0%, from 10.7% in June."

The widespread effects of the cost of living crisis have yet to be realised to their fullest extent, but is already being felt by many across the UK. In stark contrast, however, in August Nationwide reported an increase in house prices in its July Index. Robert Gardner, Nationwide's Chief Economist, said: “July saw a modest increase in the rate of annual house price growth. Prices rose by 0.1% month-on-month, after taking account of seasonal effects – the twelfth successive monthly increase. The housing market has retained a surprising degree of momentum given the mounting pressures on household budgets from high inflation, which has already driven consumer confidence to all-time lows. While there are tentative signs of a slowdown in activity, with a dip in the number of mortgage approvals for house purchases in June, this has yet to feed through to price growth.”

"July saw a modest increase in the rate of annual house price growth. Prices rose by 0.1% month-on-month, after taking account of seasonal effects - the twelfth successive monthly increase."

The limited stock in the market will also be putting pressure on prices. Gardner continues in the Nationwide Index: “we continue to expect the market to slow as pressure on household budgets intensifies in the coming quarters, with inflation set to reach double digits towards the end of the year. Moreover, the Bank of England is widely expected to raise interest rates further, which will also exert a cooling impact on the market if this feeds through to mortgage rates.”

First mooted some months ago, on August 1st the Bank of England scrapped the mortgage affordability tests that were first introduced in 2014 as one way to avoid the errors which contributed to the 2008 financial crisis. The Guardian reported in August that the financial policy committee of the central bank said it was scrapping the rule. They report the reasoning for this was that forcing borrowers to stay within a limit of 4.5 times earnings when they apply for a loan was enough of a safeguard. Removing the test may help some potential borrowers get loans, such as the self-employed or freelance workers. But other rules, such as strict loan-to-income limits, will not help most people to get a mortgage. Mark Yallop, chairman of the Financial Markets Standards Board, told the BBC that although the change would make it “slightly easier” for some borrowers to get a mortgage, he did not think it would have a significant impact. He states that “the biggest constraint on new mortgages is the ability of borrowers to afford a deposit.”

"We continue to expect the market to slow as pressure on household budgets intensifies in the coming quarters, with inflation set to reach double digits towards the end of the year."

While many experts predict a slowdown in the housing market, it could be more akin to a stabilisation, with the soaring increases of the last few years reaching something of an equilibrium. Richard Donnell, executive director of research at Zoopla, said in the company's latest index: “The ongoing impact of the pandemic continues to support a desire to move among home buyers. This is a big reason why the market is not slowing as fast as some might expect and demand remains for sensibly-priced homes, especially in more affordable areas.” With inflation set to hit double digits by the end of the year, priorities will shift as people scrutinise their budgets. Donnell continues -“the housing market is not immune from higher mortgage rates which we are starting to see increase quickly [...] Buyer interest is expected to slow over the coming months as people tighten their belts and spend with more caution which will see price growth weaken further.”

To read the rest of our Q4/22 Magazine, swing by our office to pick up your copy! Or check out the link below: https://issuu.com/briklondon/docs/brik_magazine_-_2022_-_q4_-_issuu

Illustration by Will Dodd.