For Joe, a young worker in his twenties, high rents made living and working in London very precarious.
“Our rent costs 50% of our combined wages before bills,” says Joe, who shares with his partner, the receptionist. They pay £1,450 a month for a ‘very small’ one-bedroom apartment. The couple’s lease recently expired and they now have an informal agreement with the landlord to stay in the apartment.
If we are evacuated, we will end up being unable to purchase similar properties. We will have to go back to live with our parents. I will have to quit my job, as my parents live outside commuting distance,” he says.
Although rents are rising rapidly, with house prices starting to fall, the Bank of England raising interest rates to levels last seen in 2008 and Britain facing a prolonged recession, indications are increasingly that the housing market has peaked.
The bank’s chief economist, Huw Pill, warned last week that “there is still more to do” to tackle rising inflation, despite the rising risks of a prolonged recession. The central bank raised its policy rate by 0.75% to 3% in early November, the largest single rise in borrowing costs since 1989. It will add about £3,000 a year to mortgage bonds, on average, for households due to renew their loans real estate. Money markets expect interest rates to rise to 4.5% by May, and to stay near that level for the rest of 2023, although expectations for peak rates have subsided since Liz Truss and Kwasi Kwarteng left. The governor of the bank, Andrew Bailey, suggested that the peak prices could be much lower.
Here we look at the warning signs for the housing market.
Affordability
Wages have failed to keep pace with rising home prices in recent years, making it difficult for first-time buyers to save for a deposit, while years of cheap borrowing are over.
The price of new fixed-rate mortgages began to rise over the summer, surging after Liz Truss’s disastrous government mini-budget unleashed chaos in the financial markets. The two-year average fixed rate jumped to 6.65% in late October and is now at 6.35%, while the five-year fixed cost is 6.12%, according to Moneyfacts, although those rates have since fallen back.
The Bank of England has warned just over two million mortgages, nearly a quarter of the total, at the end of their term by the end of 2023 and likely to be refinanced at much higher rates.
UK housing market analyst Neil Hudson says: “In isolation, these high mortgage rates may cause hardship for some families, but the impact on the broader housing market and economy can be managed.
However, along with high mortgage rates, there is the cost of living crisis, with rising inflation and increasing energy costs along with rapidly rising rents. It now appears that we can add public spending cuts and wage caps to the list. The outlook for the housing market and the economy looks frightening – and any deterioration in one will carry over to the other.”
Number of homes re-owned in the UK Banking authority UK Finance last week reported a 15% rise to 700 in the third quarter from the second quarter. However, they are still at low levels, as this is only half of the total of 1,340 in the third quarter of 2019.
Home prices are starting to fall…
Nationwide, the country’s largest building community, said the average UK house price fell 0.9% in October from September to £268.282, while Halifax, another major mortgage lender, reported a 0.4% monthly drop in values, Annual house price growth slowed sharply. . The Royal Institution of Chartered Surveyors reported that house prices stalled last month after more than two years of growth. The latest Office for National Statistics data shows that the annual rise in home prices eased to 13.6% in August, from 16% in July.
In a sign of more weakness ahead, mortgage approvals for home purchases fell to 66,800 in September from 74,400 in August, the Bank of England reported.
… and values are expected to decline more sharply in 2023
NatWest Group expects home prices to fall 7% next year, while EY Item Club, an economic forecaster, expects prices to fall between 5% and 10%.
“With mortgage rates remaining above 5% in 2023, demand will remain low and cause home prices to fall 12% from peak to trough” over the next 18 months, says Matthew Boynton, chief economist at consultancy Capital Economics.
Real estate agent JLL notes that incidents of house price crashes have been rare in the UK (prices fell by 20% during the recession of the early 1990s and by 15% during the 2008-2009 financial crisis). It expects prices to fall by 6% next year.
“This is not 2008,” says Callum Pickering, chief economist at Berenberg Bank. “Most mortgage debt falls to families who have ample savings reserves and can afford higher interest costs without breaking the bank.”
He says a faster-than-expected correction in the housing market means the bank does not need to tighten further. “If the bank stops prowling soon, further declines in mortgage rates should contain the risk of a massive house price crash of 15% or more.”
Analysts say a large wave of repossession looks unlikely, because lenders will do what they can to avoid it. Banks have been bracing for higher loan default rates, with HSBC committing £965m and Lloyds Banking Group £668m. “But there could be a shock to almighty consumer spending on top of the cost-of-living crisis,” Hudson says.
Newbuild home sales slowed sharply
Three of Britain’s largest homebuilders – Persimmon, Taylor Wimpey and Redrow – have reported a sharp slowdown in sales and rising cancellation rates in recent weeks. Aside from deteriorating economic prospects, government-sponsored assistance in the procurement program, which accounts for a large portion of sales, is about to expire. Housebuilder shares tumbled last year as investors took a dim view of their outlook.
Rents have reached record levels
Average monthly private rents hit a record high of £1,162 this quarter as tenant demand far outpaced the supply of homes to let in, forcing more people to downsize studio apartments, according to property website Rightmove.
The average advertised rent in Greater London, at £2,343, was 16.1% higher than last year, the highest growth rate of any area ever. However, some cities and towns experienced larger annual increases: 22.2% in Newbury, 20.5% in Manchester, 19.6% in Cardiff, 18% in Edinburgh 18%, 17.6% in Birmingham.
According to research from the Joseph Rowntree Foundation, private renters are twice as likely as homeowners to develop anxiety symptoms.