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  • Writer's pictureInvestment Synergy Team

UK house prices: what will happen now the markets are in turmoil again?

Updated: Jun 6, 2023

Carol Lewis - the Sunday Times

The markets are in turmoil, lenders are withdrawing mortgage products and hiking rates amid talk of a property price crash. There is a sense of déjà vu: it all feels very September 2022 (when a similar thing happened after Kwasi Kwarteng’s mini-budget), with nearly 800 mortgage deals pulled last week.

Although to my mind the mood seems darker than it did six months ago — this is not a one-off event that can be quickly resolved. It looks increasingly unlikely that the UK will dodge recession and emerge from financial gloom anytime soon.

Not long ago pundits thought that the base interest rate had peaked (or at least nearly reached the summit) at 4.5 per cent; now the chatter is of 5.25 per cent and beyond — with a 0.75 percentage point rise predicted at the Bank of England’s monetary policy committee meeting on June 2023

Meanwhile the price of fixed-rate mortgage deals is two percentage points higher than they were a year ago, with some 200 fewer products on the market, according to the financial analyst Moneyfacts.

This is casting a long shadow over the housing market. The number of mortgage approvals for property purchases was down 26 per cent in the past year. At a time when there is a surfeit of houses for sale we are seeing transactions and prices edge down. It most areas of the country we are now well into buyers’ market territory and sellers can no longer call the shots.

However, note that I say house prices are edging down, not plunging or crashing. Sellers are not so desperate yet that they need to accept cheeky offers. According to the Nationwide bank, based on mortgage data (so excluding cash sales) prices are down 0.1 per cent in the past month and 3.4 per cent in the past year.

House prices are now down about 4 per cent from their peak last August. The majority of predictions on what would happen to house prices lay in the range of a 5 to 10 per cent fall from peak to trough (excluding inflation) — on which reckoning we could have a way to go.

It is usually estimated that Bank of England interest rate changes take about a year to feed through into the economy and 18 months to impact inflation. When looking at its impact on the housing market you also need to add in the lag in data reporting — the Official for National Statistics house price index (which records actual sold prices) is down 2.6 per cent on its peak in November.

However, after two years of writing about double-digit growth in house prices I refuse to be swept up into a frenzy about the slow deflation of prices that is happening now — which would in effect simply start to unravel the pandemic rises. Prices are likely to drift down, possibly in fits and starts, well into next year.

Good, you may well think: we could all do with house prices being a little more affordable. But there’s the rub: prices may be coming down but they are no more affordable. High inflation and high mortgage rates (and the knock-on effect on rents) are making it harder than ever to save a deposit or pay a mortgage. Last month CS Venkatakrishnan, the boss of Barclays bank, estimated mortgage costs could rise from being 20 per cent of income (as they have been for the past few decades) to 30 per cent by the end of the year — and that comes on top of astronomical food and energy bills.

Of course there are still cash buyers, those with equity who are downsizing and those with savings who can ride out the storm, and it will be these people who will help cushion the blow to house prices. Outside of death, divorce and debt, it will be this distribution of equity that will dictate where we will experience the most dramatic cuts in property prices.

Meanwhile we face the prospect that the housing market will stagnate as sellers who don’t need to accept discounts hold out and buyers hunker down and wait for mortgage rates and inflation to ease. All we can hope is that this happens faster than today’s gloomy forecasts suggest.

Investment Synergy - In the words of Status Quo " down down deeper and down"

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