The crisis engulfing the UK’s housing market increased as it was revealed annual prices fell for the first time in three years.
A drop in mortgage approvals to home buyers added to the list of grim statistics hitting the housing sector. The number of mortgages being approved to home buyers fell for the fifth month in a row in January, according to Bank of England figures. About 39,600 mortgages were approved for house purchase in January, down from 40,500 in December. Excluding the pandemic, the latest total marked the lowest number of approvals since January 2009, when 32,400 were recorded.
The actual interest rate typically paid on newly drawn mortgages increased to 3.88% in January, according to the Bank’s Money and Credit report. Andrew Bailey, Bank of England governor, further added to home buyers’ misery when he warned that interest rates may need to go up again to slow the cost of living down. Higher rates may be appropriate, I would caution against suggesting either that we are done with increasing Bank Rate, or that we will inevitably need to do more,” he said.
The Bank’s interest rate setting committee would see more information about the impact on the UK economy of a series of increases before judging how best to wrestle inflation back to its target 2% rate from its current 10.1%.
House prices fell by 1.1% year-on-year last month, according to figures from the Nationwide. Prices are now 3.7% lower than their August 2022 peak. The last time UK house prices contracted annually was December 2012, it said.
Robert Gardner, Nationwide’s chief economist, said "the mini-Budget last September sparked the tumbling prices but that while financial markets had 'normalised some time ago, housing market activity remained subdued,' this likely reflects the lingering impact on confidence as well as the cumulative impact of the financial pressures that have been weighing on households for some time. Indeed, inflation has continued to outpace wage growth and mortgage rates remain significantly higher than the lows recorded in 2021.”
Mr Gardner said, "it will be hard for the market to regain much momentum with unemployment expected to grow as the economy shrinks. Despite the modest fall in house prices, for a prospective first-time buyer, earning the average income, looking to buy the typical home – mortgage payments remain well above the long-run average as a share of take-home pay. In addition, deposit requirements remain prohibitively high for many and saving for a deposit remains a struggle given the rising cost of living, especially for those in the private rented sector where rents have been rising strongly. "
Persimmon, one of the UK’s biggest housebuilders, added to housing gloom when it announced plans to nearly halve the number of homes it releases onto the market this year. Persimmon said it would build and sell between 8,000 and 9,000 homes in 2023, down from close to 15,000 the year before. This year will be “difficult”, Persimmon said. Chief executive Dean Finch said, “the market remains uncertain. The sales rates seen over the last five months mean completions will be down markedly this year and as a consequence, so will margin and profits.”
Persimmon’s pre-tax profits fell as it set aside another £275m to deal with the cost to make building safe in the wake of the Grenfell disaster. Its profits were £731m as revenues rose to £3.8bn
Government – watered down new build targets may exasperate housing crisis
Government's pledge to build 300,000 homes per year falling further out of reach. The need for more affordable housing in the UK is a prevalent issue, with demand superseding supply in recent decades. During the back end of 2022, housing secretary Michael Gove announced what was seen by many as a watered down amendment that will result in ‘advisory’ rather than ‘mandatory’ housebuilding targets, effectively putting an end to the government’s pledge to build 300,000 homes a year.
This decision was met with dismay by many experts within the industry who stressed that the result would lead to fewer new builds, further exasperating the housing crisis. New builds – the need for more homes.
David Hollingworth, associate director of communications at L&C Mortgages, said, "the need for more houses to be built is clear, that target numbers have risen for as long as he can remember, without ever seeming to get close to the point where they can be achieved. So, the argument is not about whether there is a need for more homes to be built or whether there should be a target to help deliver the supply of more affordable homes, but more about how that will be best delivered.”
On the face of it, Hollingworth said, "making a target advisory, rather than mandatory, looks to only open the door to targets being missed. There is a lot of political play at work of course, but he believes the main argument against the amendment would be that advisory targets may result in a number of unintended consequences. These consequences, for example, could stem from poorly delivered housing or alternatively nimbyism for communities to prevent new development.”
He believes that watering down local targets will only make it harder to reach the 300,000 target, and risk the supply of property remaining lower than it needs to be to help boost the availability of affordable property. However, he said that if the advisory target helps to bring better flexibility and allows local authorities to decide how to best deliver the right type of homes in the right place, then it may avoid poorly conceived development.
Benefits of new builds
With the cost-of-living crisis continuing to impact homeowners across the country, Lyn Webb, director of Mortgage Saving Experts, said, "new builds remain highly desirable. New build homes have a higher price tag than older houses, but with cheaper energy bills and less maintenance, they may be cheaper in the long run. Additional benefits of new build homes include being chain free, as well as more safety and security features than older homes. "
She believes that with buyer confidence beginning to return, the desirability from customers to purchase new build properties will grow, however Webb added that it will come down to whether there is enough supply to meet the demand.
New builds – has stability returned?
While there is a concern the government’s amendment may result in the declining production of new build homes, Webb said this year could bring more stability to the UK housing market after a bumper year in 2021 when house prices were pushed to record highs. With signs of stability slowly returning, Webb said, " increased demand may force the government’s hand and push them to construct more new build properties, or to encourage local authorities to do so. The trend of people moving out of cities as a result of more flexible working conditions to continue in 2023, further impacting the need for more newly built homes on the outskirts of locations with major infrastructure."