What Is Going On In The UK Housing And Rental Markets?
Buyers’ House Prices Have Begun To Decline But Housing Rentals Have Hit All-Time Highs
Rising rents have made living and working in London difficult for Joe, a youth worker in his twenties.
“Our rent costs 50% of our combined wage before bills,” adds Joe, who lives with his receptionist partner. They are paying £1,450 per month for a “very small” one-bedroom apartment. The couple’s tenancy arrangement just ended, and they now have a casual agreement with the landlord to continue living in the property.
“If we were evicted, we’d end up being unable to afford a similar property. We would have to move back in with our parents. I’d have to leave my job, as my parents live outside commuting distance,” he says.
Although rents are swiftly rising, house prices are beginning to decline, the Bank of England is hiking interest rates to levels last seen in 2008, and Britain is in the grip of a lengthy recession, growing evidence indicates that the housing market has peaked.
Despite the mounting dangers of a lengthy recession, the Bank’s chief economist, Huw Pill, cautioned this week that there was “still more to do” to combat skyrocketing, double-digit inflation. In early November, the central bank raised its base rate by 0.75 percentage points to 3%, the most significant single increase in borrowing costs since 1989. It will add around £3,000 per year to mortgage expenses for homeowners planning to renew their mortgages. Interest rates are expected to climb to 4.5% by May and remain there for the rest of 2023, however, estimates for peak rates have dipped since the departures of Liz Truss and Kwasi Kwarteng. Andrew Bailey, the governor of the Bank of England, has hinted that the peak rate might be lower.
The property market’s warning indicators:
Affordability…
Wages have failed to keep pace with rising property prices in recent years, making it more difficult for first-time buyers to save for a deposit, while the era of low-cost borrowing has ended.
As of Aug 2022, the price of an average house is 9.45 times the average wage.
The cost of new fixed-rate mortgages began to rise throughout the summer and skyrocketed after the Truss government’s failed mini-budget wreaked havoc on financial markets. According to Moneyfacts, the average two-year fixed rate rose to 6.65% in late October and is presently at 6.35%, while the five-year fixed rate is 6.12%.
By the end of 2023, just over 2 million mortgages, or around a quarter of the total, will have reached the end of their fixed term and will be “likely to be refinancing at much higher rates,” according to the Bank of England.
A UK housing market analyst, Neal Hudson said: “In isolation, these higher mortgage rates would cause hardship for some households, but the impact on the wider housing market and economy could be managed.
“However, alongside higher mortgage rates, there is the cost of living crisis, with high inflation and increasing energy costs alongside rapidly rising rents. And it now looks like we can add public spending cuts and pay caps to the list. The prospects for the housing market and economy are looking scary – and any deterioration in one will feed through to the other.”
According to UK Finance, the number of repossessed houses in the UK increased by 15% to 700 in the third quarter compared to the second. They continue, however, at low levels since this represents just around half of the total of 1,340 in the third quarter of 2019.
House prices have started falling…
The average UK house price declined 0.9% in October from September to £268,282, according to Nationwide, while Halifax, another major mortgage lender, recorded a 0.4% monthly drop in prices and yearly house price growth has slowed dramatically. According to the Royal Institution of Chartered Surveyors, home prices halted last month after more than two years of continuous increases. According to the most recent Office for National Statistics (ONS) figures, annual home price increases slowed to 13.6% in August, down from 16% in July.
Annual housing price inflation has reduced significantly…
Mortgage approvals for home purchases fell to 66,800 in September from 74,400 in August, indicating additional weakness ahead, according to the Bank of England.
…and values are expected to drop more sharply in 2023.
The NatWest Group predicts that house prices will plunge by 7% next year, while the EY Item Club, an economic forecaster, predicts price drops of 5% to 10%.
Matthew Pointon, a senior economist at the consultancy Capital Economics, said: “With mortgage rates set to remain over 5% in 2023, demand will remain depressed and lead to a 12% peak-to-trough fall in house prices” over the next 18 months.
According to real estate advisors and professionals, Jones Lang LaSalle (JLL), home price collapses are uncommon in the UK; values plummeted 20% during the early 1990s recession and 15% during the 2008/9 financial crisis. It forecasts a 6% drop in prices next year.
“This is not 2008,” says Kallum Pickering, a senior economist at Berenberg Bank. “Most mortgage debt sits with those households who have ample savings buffers and can afford higher interest costs without breaking the bank.”
He says the quicker-than-expected housing market correction means the Bank does not need to do much more tightening. “If the Bank stops hiking soon, further falls in mortgage rates should contain the risk of a massive collapse in house prices of 15% or more.”
According to analysts, a large wave of repossessions is unlikely since lenders would do whatever possible to avoid them. Banks have been planning for increased loan defaults, with HSBC setting aside £965 million and Lloyds Banking Group laying aside £668 million.
“But there could be an almighty consumer spending shock building on top of the cost of living crisis,” says Hudson.
New-build home sales have dropped dramatically.
In recent weeks, three of the UK’s largest housebuilders – Persimmon, Taylor Wimpey, and Redrow, have reported dramatically slower sales and increased cancellation rates. Aside from the deteriorating economic picture, the government-sponsored help-to-buy programme, which accounted for a significant portion of sales, is likely to come to an end. Housebuilder stocks have dropped in the last year as investors have become pessimistic about their prospects.
Rents have hit all-time highs.
According to the property website Rightmove, average private monthly rentals hit a record high of £1,162 this quarter as renter demand considerably outstripped the availability of properties, pushing more individuals to downsize to studio apartments.
Outside of London, average monthly asking rentals have set a new record.
Greater London’s average advertised rent of £2,343 was 16.1% higher than a year before, the greatest pace of rise of any area on record. However, yearly increases in certain cities and towns have been much higher: 22.2% in Newbury, 20.5% in Manchester, 19.6% in Cardiff, 18% in Edinburgh, and 17.6% in Birmingham.
According to the Joseph Rowntree Foundation, private renters are twice as likely as homeowners to have anxiety symptoms.
Online sources: theguardian.com, persimmonhomes.com, taylorwimpey.co.uk, redrow.co.uk
All opinions and views expressed or suggested by the Digital Zeitgeist are not necessarily the same opinions and views held by or suggested by GPM-Invest plus any and all partners, affiliates, parties, or third parties of GPM-Invest. Any type of media distributed by GPM-Invest IS NOT financial advice. Please seek advice from a professional financial advisor