Following the catastrophic “mini-budget” that caused interest rates to skyrocket on the few mortgages still on offer, UK house prices continue to follow a downward trend. Indeed, house prices have dropped for four consecutive months now. According to mortgage provider Halifax, average house prices fell 1.5% between November and December. The decline is not as marked as the 2.4% drop recorded between October and November.
Still, the annual rate of house price growth slowed to 2% in December, down from 4.6% in the previous months. In my opinion, that rate will turn negative by the end of March.
In absolute terms, the typical property price stands at £281,272 in December (down from £285,425 in November and from £294,000 in August). Sadly, Halifax only released the cost of an average home in London (£541,239 in December). It would have been interesting to see the average cost of a home in central London (zone 1). I suspect the drop might have been even more pronounced in spite of a recent influx of Asian buyers and residents following political changes in Hong Kong.
Interest rates are still causing havoc but there are other factors at play
The Bank of England has raised interest rates nine times in the past year in an attempt to fight inflation. In addition to the spike in borrowing costs caused by Liz Truss, the country’s mortgage offering was severely curtailed by banks which could not keep up with soaring rates and the political instability. As you will recall, market expectations of further rate rises jumped after then chancellor Kwasi Kwarteng unveiled a “moni Budget” that contained £45 billion of unfunded tax cuts.
A recent report from the Resolution Foundation underscored the rising costs facing British families: the thinktank believes that approximately 3 million households face a £3,000 a year increase in their mortgage costs by the end of the 2023-24.
There are also reports that banks are applying more stringent criteria in an attempt to anticipate the cost-of-living crisis’ effects on households’ ability to make timely repayments.
Higher interest rates have also deterred house builders from embarking on new projects, according to data published last Friday that showed the construction sector contracted in December. That is particularly problematic because a constant lack of inventory and new supply are the main reasons as to why house prices remain at elevated levels. Lack of new supply may soften the decline but remains bad news for economic activity. For example, orders for new homes slumped while plans for civil engineering projects and commercial office buildings were put on hold, based on the latest S&P Global/CIPS construction PMI, which fell from 50.4 in November to 48.8 in December.
Some short term hope for home owners needing to refinance
Nationwide, the UK’s largest building society, cut up to 0.6% from its mortgage rates last Friday. The rate for a five-year fixed rate mortgage when borrowing 85% of the property valued dropped to 4.84%. Following a similar trend, TSB cut rates on five-year fixed rate mortgages for buyers by up to a percentage point. The rate for a five-year fixed rate mortgage when borrowing 85% of the property value fell to 5.49%.
It would appear that the policy reversal carried out by Jeremy Hunt restored some calm on the interest rate front while lenders are also responding to falling demand for mortgages by cutting rates.
Home buyers should be cautious
Halifax predicts that house prices will fall around 8% over the course of 2023. If house prices for the first six months of 2022 grew rapidly, they leveled off during the summer and have continuously dropped since September. A drop of 8% would mean that the cost of the average property returning to April 2021 prices, which remains an elevated level compared to the end of 2019.
The big unknown remains mortgage default. While there is no reason to be alarmed at this stage, an uptick in repossessions would accelerate the drop in house prices.
On a more positive note, cash buyers (are there any left?) are king. It might still be a little bit early to make a move but there will be interesting real estate opportunities for the first time since 2019. Except for very niche properties, bidding wars are no longer a thing.
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