When mortgage rates began shooting upwards in the latter months of 2022, many expected house prices to fall dramatically.
Simple logic assumed that higher borrowing costs would mean buyers wouldn't be able to afford the same mortgage they could before, and prices would therefore plummet. But property prices have not fallen. Instead, they have plateaued.
Average house prices have fallen only 2.1% since peaking in September 2022 at £288,901, according to official Land Registry figures.
As of March this year, they are at £282,776 - only £6,000 off the all-time high.
Both Nationwide and Halifax also report only modest house price falls based on their own mortgage lending data.
Nationwide says house prices are 4% below the peak recorded in summer 2022, taking into account seasonal effects. Meanwhile Halifax says prices are down just 1.6% on the summer peak in 2022, falling from a high of £293,507 to £288,949 as of April this year.
Why has this happened, and how are homeowners affording to pay these higher mortgage costs?
Aneisha Beveridge - head of research at Hamptons says "that mortgage lenders are now stricter about how much money they will lend, which means more homeowners are able to keep up their repayments even though they have risen. One key factor has been the absence of forced sellers. More stringent stress tests introduced after the 2008 crisis have provided a safety net for the 7.2 million households with mortgages. These ensured that most homeowners refinancing last year had already been stress-tested to higher rates and could absorb the increased cost. These tests, alongside the longer-term fall in the number of mortgaged households, mean there have been very few forced sellers. Over half, or 54%, of homeowners in England now own their property outright, up from 46% in 2008."
The mortgage charter was a set of guidelines agreed between the Government and many mortgage lenders, detailing the extra support they would offer customers when rates began rising.
Beveridge says "for households facing financial difficulty, the mortgage charter offered a lifeline by enabling them to transition to interest-only mortgages or extend their mortgage term to reduce their monthly payments. Although the numbers taking up the option were relatively low, it helped prevent repossessions and a flood of homes entering the market, which could have quickly put downward pressure on house prices, as seen post-2008. House prices also reflect the people who move, rather than those who don't. In 2023, the housing market was driven by buyers who could afford to move, keeping upward pressure on prices,. Downsizers, who have accrued substantial equity in their properties, were particularly active. Meanwhile, upsizers, who found it costly to move with higher mortgage rates, took a backseat, waiting for rates to fall."
Sam Mitchell - Purplebricks boss says "property prices don't behave in the same way as the prices of other things, because it is stressful and costly to sell. Last year was a particularly challenging year for housing, and yet prices did not drop much at all. This is because property doesn't behave like more liquid assets. If you think the price of oranges is going to go down, and bananas up, you sell oranges and buy bananas. If you believe house prices are going down, you'll still need somewhere to live regardless. A house is a home, so people don't tend to sell in favour of renting and then buy again, particularly when the high transaction costs, risk and stress associated with moving is considered. When the property market is uncertain, more people tend to stay put and do nothing - which isn't reflected in house price figures. If people think that values may fall they tend to sit tight until prices recover, so you see transactions affected much more than prices. This was particularly true in the second half of 2023 when transactions dropped significantly.
In 2024, we are seeing green shoots of confidence return, mortgage approvals start to sneak up - albeit from a low base - and a window of opportunity exists to move before the inevitable market paralysation when the election kicks in. Positive sentiment from buyers and an overall improvement in market confidence also continue to fuel activity and preserve the stability of the housing market. Purplebricks is seeing a rise in viewing activity, and there has also been an increase in new market offerings that has resulted in more sales. The Bank of England announced at the beginning of this month that mortgage approvals are at a 17-month high, a positive trend that people will likely seek to capitalise on."
Anthony Codling - investment bank housing analyst argues "the vast majority of homeowners are not as badly impacted by higher mortgage rates as we are led to believe. More people own their home outright than are buying with a mortgage, and we estimate that the average loan to value across the whole housing market is about 25%. The amount home movers are borrowing is probably less than you may imagine. Therefore, the average homeowner's finances are less sensitive to mortgage rates than you may think. Borrowing from parents is still a huge factor in helping first-time buyers on to the ladder. 'The Bank of Mum and Dad is alive and well. The average first time buyer deposit is equivalent to one year's salary, before tax, and the average first time buyer deposit is around 25%.
Those buying their home without help from parents are in the minority, and parents' desire to help their children (or grandchildren) buy a home is higher than today's mortgage rates. There are of course buyers that will feel they can't afford to borrow as much as they once could due to higher mortgage rates, but Codling argues they tend to simply compromise on size or location rather than delay their plans altogether.
'Size is important, we tend to see that if someone wants to move, and they feel secure in their employment, they tend to move. The mortgage rate impacts where they move to and how big a home they buy. This means that we see homebuyers they find a house with a price that works for them, rather than holding out for the price of an unattainable house to fall. For instance, if a baby is on the way, or a child is due to start school, it is more important to buy a house by a certain date than play the waiting game on house prices."
Andrew Wishart - senior economist says "wages rising and the job market being relatively healthy have also helped people to continue buying homes. While house prices only fell by 5% in nominal terms [at the height of mortgage rate rises] they fell by 15% in real terms, i.e. adjusted for inflation. Pay eventually rose by the same amount as consumer prices over the past two or so years, so buyers have more income which has helped them to afford higher mortgage payments.
The amount buyers can borrow, together with their deposits, decides how much they can afford to pay for a home. The spreading out of repayments over much longer periods of 35 to 40 years rather than 25 years has kept big mortgages affordable even though mortgage rates are higher. For instance, a £200,000 mortgage with a 25-year term cost £845 a month when mortgage rates were 2 per cent, rising to £1170 at a mortgage rate of 5%. But extending the term to 40 years reduces the payment back down to £965 per month."