Too early to tell whether activity in the housing market has started to recover.
House prices – now at an average of £258,297 – fell by 0.6% in January, continuing a monthly decline that pulled prices down to a level 3.2% lower than their peak in August 2022.
The latest Nationwide House Price Index also showed a further slowing in annual house price growth to 1.1% in the year’s first month, from 2.8% in December 2022. Robert Gardner, chief economist at Nationwide Building Society, said "that while there are some encouraging signs that mortgage rates are normalising, it is too early to tell whether activity in the housing market has started to recover. The fall in house purchase approvals in December reported by the Bank of England largely reflects the sharp decline in mortgage applications following the mini budget,” Gardner noted. “It will be hard for the market to regain much momentum in the near term as economic headwinds are set to remain strong, with real earnings likely to fall further and the labour market widely projected to weaken as the economy shrinks. As we highlighted in our recent affordability report, the biggest change in terms of housing affordability for potential buyers over the last year has been the rise in the cost of servicing the typical mortgage as a result of the increase in mortgage rates.”
Gardner added that "should recent reductions in mortgage rates continue, that should help improve the affordability position for potential buyers, albeit modestly, as will solid rates of income growth, especially if combined with weak or negative house price growth. Nevertheless, the overall affordability situation looks set to remain challenging in the near term,” he pointed out in the Nationwide report. “Saving for a deposit is proving a struggle for many given the rising cost-of-living, especially those in the private rented sector where rents have been rising at their strongest pace on record.”
Marc von Grundherr, director at estate agency Benham and Reeves, remarked that the decline in house prices seen in recent months is “more akin to the market tripping over its shoelace than falling off a cliff edge. We’ve simply not seen the catastrophic property market decline that was so widely predicted during the latter stages of last year,” he said. “Yes, buyers are treading with caution and sellers are having to adjust their price expectations in line with this changing market, but our appetite for homeownership remains strong and we continue to see activity despite wider economic turbulence.”
Nicky Stevenson, managing director at national estate agent group Fine & Country, commented that "while buyers have returned to the market in greater numbers since the shocks of the mini budget last autumn, home loan approvals have dipped for the fourth consecutive month in December. A month without a base rate rise – when it finally comes – could be enough to produce a quick turnaround in home-buyer numbers,” she said. “As the Bank of England weighs up whether to make a 10th successive hike in interest rates tomorrow, buyers will be hoping lenders have factored another rise into their products already. If mortgage rates remain stable, this could be enough to convince many people to resume their property search.”
For James Briggs, head of personal finance intermediary sales at specialist lender Together said "even with prices falling and possible opportunities for first-time buyers to snap up relatively cheaper deals, the looming Bank of England base rate decision this week could trigger further belt tightening in the short term. That’s not to say overall activity will grind to a halt,” Briggs clarified. “Latest industry figures showing second charge lending increased year-on-year by 45.3% to £1.71 billion in 2022, in a sign that while new home moves may slow down, there is a clear rise in people using this route to raise capital and reinvest in their current homes by making improvements there, rather than moving on. In addition, for new buyers looking to take advantage of lower house prices, there are a number of different schemes available to explore, such as shared ownership and right-to-buy.”
Why Britain’s falling house prices will not bounce back
Figures published last week by Nationwide confirmed that house prices have now fallen for five months in a row, the longest stretch since 2009. Values are down by 5.6% compared to their August peak, meaning the average home is now worth £15,454 less than at the end of the summer.
The data confirm that Britain is facing its worst housing market crash since the financial crisis and leave many homeowners asking: how bad will it get?
Analysts believe the current house price slump will not be as big as the one suffered during the financial crisis – but the downturn will last much longer. During the credit crunch, house prices fell for 16 consecutive months, according to Nationwide. This time, analysts at Oxford Economics expect the slump to last 24 months. Britain is set for a more drawn out property crash because of changes in the mortgage market, which mean the pain of higher interest rates will filter slowly through the market rather than hit all at once.
However, while the slump will be prolonged, Oxford Economics forecasts prices will only drop by 12pc peak-to-trough, compared to the 18pc crash recorded from 2008 to 2009. Andrew Goodwin, of Oxford Economics, says: “We think the much higher share of fixed rate mortgages now will limit the fall in prices and make it less steep, but more prolonged. So far, the market has been remarkably protected because unemployment is low and a very high share of homeowners are on fixed rate mortgages. The biggest driver of house price falls is the extent to which people are forced to sell. That happens either if they lose their job or if the cost of their mortgage is too big to keep going.”
Ten years of ultra-low interest rates following the financial crisis brought a sea change in the structure of the British mortgage market that is now limiting the speed of price falls. Cheap rates brought a huge incentive to lock in. In the 10 years from 2012 to 2022, the share of mortgage borrowers on variable rates – which fluctuate in response to changes in the Bank Rate – plunged from 71% to 15%, according to Capital Economics.
More recently, as the Bank of England began raising interest rates from the end of 2021, homeowners rushed to remortgage and lock in cheaper rates for longer. The shift to fixed rates in the post-2008 years is one of the reasons why house prices in Britain have not been falling as quickly as in other countries such as Sweden, where far more mortgages are on floating rates. The effective rate on outstanding mortgages, which moves more slowly than the effective rate for new loans, has been climbing from its low of 2.01% at the end of 2021 thanks to successive rate rises.
By the end of 2024, it will have nearly doubled to 3.92%, according to Capital Economics’ forecast. Yet it would have hit 5.17% by the end of this year if the mortgage market still looked like it did back in 2012, according to Capital Economics. However, fixed rate deals cannot protect homeowners forever. An estimated 1.8m homeowners will come to the end of their deals in 2023 and will have to refinance at much higher rates.
About 7.4% of mortgage holders will be looking for new deals in the first three months of the year, with a steady flow for the rest of the year. The drumbeat of homeowners coming off fixed rate deals means the blow of higher interest rates will be more protracted than if all homeowners had variable rate deals. People refinancing during 2023 and 2024 will also be stuck on higher rates for longer, even after the Bank of England eventually begins cutting interest rates, those two factors together mean that we are unlikely to see a big bounce back in the housing market,” Mr Goodwin says..
Andrew Wishart, of Capital Economics, says that "the high prevalence of fixed rate mortgages could push the Bank of England to keep interest rates higher for longer. It reduces the potency of monetary policy, raising the risk that interest rates have to be raised further or kept higher for longer to compensate.”
The speed and scale of price declines is just one way to compare the two market slumps. Another is affordability levels. Mortgage affordability in the years to come will depend on how high interest rates go and how long they stay at those levels. If the Bank Rate has already peaked at 4%, the share of income needed to cover payments on a typical mortgage will return to the level recorded in February 2022 by November 2024, according to Pantheon Macroeconomics.
However, if the Bank Rate rises to a higher peak of 4.5%, housing affordability will still be as bad as in 2008 by the end of 2024. Then there is the question of recovery. After the initial sharp drop, house prices quickly rebounded thanks to central banks around the world slashing interest rates. This time, there will be no such stimulus as the Bank of England grapples with inflation. Simon Rubinsohn, of the Royal Institution of Chartered Surveyors, says "interest rates are unlikely to return to the rock bottom levels enjoyed in the post-financial crisis era. Even after the Bank starts to cut the Bank Rate, it will settle at around 3," he believes.
That means no bounce this time. “I don’t think the housing market will bounce back in the near term in terms of prices or activity,” in terms of the economy, the financial crisis saw a very sudden collapse and then a rebound. Now, everything is very soggy. There will be a weaker upturn if you have a shallower downturn,” Mr Rubinsohn says.