James Setright, 36, took the opportunity to move while prices were falling.
“ I wanted to take advantage of the market . I don't think I'll ever again be able to buy a five-bedroom Victorian house in London for less than a million pounds,” says Setright.
Across Britain, homes are being offered for sale at prices far below what they would have been sold during the pandemic as homeowners, investors buying to rent and first time buyers alike creak under the pressure of high mortgage rates and the cost of living crisis.
But the pain has just begun — and it will be caused by the mortgage market.
Inflation has not fallen as quickly as expected, which means that the Bank of England will not cut the official rate yet, and lenders maintain high mortgage rates. The result could be a slow crash, more like the recession of the early 1990s than the sudden but brief crash of 2008, some economists say.
Setright is buying up his five-bedroom home for just over £875,000, a discount off the £895,000 asking price, which he thought was already cheap.
“This property should [sell] for £1.2 million, but the guy obviously needed to get rid of her. There's an awful lot of this going on. Obviously they need to sell because they can't afford to live there and are moving elsewhere,” says Setright, who is a real estate agent himself.
James Setright is trying to take advantage of falling house prices and skyrocketing inflation pushing rates up. Photo: Ray Schroer
House prices are down 4.6% in March from their peak in August, according to the Nationwide lender's seasonally adjusted index.
Sales figures that are not seasonally adjusted are more striking. In August, the average UK home sold for £273,751. In March of this year, that figure was £257,122. That's a drop of £16,629 or 6 percent.
The British real estate market has become the lot of pragmatists. Those who don't need to sell have taken their homes off the market, leaving sellers who need to move or get rid of rental properties willing to sacrifice some of their profits made in the pandemic frenzy.
But the main question is not where house prices are now, but where they are going. Analysts say the top third of the market will be hit first as expensive homes bought with large mortgages become unaffordable.
Buy-to-let landlords who can no longer recoup interest on mortgage loans at the expense of profits. – have even more incentive to sell, which should also bring prices down when the market is flooded with former rentals.
Back in the fall of 2022, the market faced Armageddon. The effects of the mini-budget unleashed the specter of financial ruin and sent mortgage rates skyrocketing at the fastest pace on record. But the crisis has passed. Mortgage rates have fallen, the market has stabilized, and there are signs of green shoots. Has the market come out of the forest or is it a false dawn?
There is a serious threat that cannot be ignored just because it is not yet visible.
Lending conditions, namely how willing banks are to lend, is an important factor for the housing market that is little talked about, says John Muellbauer, a senior fellow at the University of Oxford and a former government adviser.
The collapse of the Silicon Valley bank in America was symptomatic of the slow, treacherous losses from the central bank's successive rate hikes. There will be more victims, and economists do not yet know where they will be.
“These things take longer than you think. The lack of an immediate effect can be misleading. The medium-term effect could be greater,” says Müllbauer.
0904 Falling house prices The invisible threat
This represents a looming potential threat to the mortgage market. British banks hold significant portfolios of government bonds, also known as securities. As the financial system falters under the pressure of rate hikes, bond prices fluctuate. “Banks' portfolios have shrunk, which means their balance sheets have become tighter,” Mühlbauer says.
The fall in house prices, which will also hit the value of their portfolios, will add even more stress. “Putting it all together, I think banks will be especially careful and their lending criteria will tighten in the next 12 months,” Mühlbauer says.
This will likely mean more strict «accessibility». tests for borrowers, smaller loans in proportion to income, and higher mortgage rates for buyers with smaller deposits.
These changes will amplify the impact on higher mortgage rates, additional pressure that buyers can hardly afford. Debt service ratios — a measure of borrowers' ability to service their mortgages — are about twice as high as they were in 2019, Mühlbauer says. “The impact of cash flow on potential new customers is very serious,” Müllbauer says.
If credit conditions tighten significantly, house prices could fall much more than expected.
The UK housing market is much more exposed to higher mortgage rates than other European markets.
On the continent, debt service payments increased by an average of a third between 2021 and 2022, according to the International Monetary Fund. In the UK, the jump was 70%. This is because the debt-to-income ratio is particularly high in the UK and mortgage rates have risen much higher than in other European countries.
UK homeowners are also more exposed to changes in interest rates.
“In the Netherlands and Denmark, homeowners have higher debt-to-income ratios than we do, but they have much longer fixed-rate deals. While this affects new buyers, the impact on cash flow for people with mortgages is much less, leading to late payments and foreclosures, which in turn is reflected in the caution banks are taking on their balance sheets. adds Mühlbauer.
While British borrowers are more protected from higher rates than borrowers in countries like Sweden, where the vast majority of mortgages are variable rate transactions that fluctuate in line with interest rates, such provision is short. -lived.
Fixed-rate deals in the UK are often short-term deals of two or five years, unlike in the US, where buyers are fixed for 30 years. This means that a large number of existing homeowners will still be affected when their fixes expire, as will 1.4 million borrowers in 2023.
“The trouble will come from people moving from a low flat rate to a much higher payout, which will be a huge burden in addition to a significant jump in fuel prices and the overall cost of living,” says Allan Fuller, a resident of the South. Real estate agent in London.
2403 mortgage costs
But mortgage rates have steadily declined since their autumn peak. The median quoted rate on a two-year fixed-rate mortgage as of April 6 was 5.32 percent, according to analyst Moneyfacts. This is below the peak of 6.65% on October 20 last year. A buyer who has taken out a loan of £200,000 will now pay £2,660 less in interest per year.
Deals are unlikely to get much cheaper. Mortgage rates have stopped falling and have risen slightly since March. Lenders have removed the surcharge they added after the 2022 mini-budget was passed, and there is nothing more to withdraw.
Rates may no longer be close to 7%, but they are stuck at twice the level they were a year ago and five times the sub-1% rates that shoppers were able to get at the height of the pandemic. They will not fall significantly until the Bank of England starts to cut the bank rate, and the surprisingly high inflation data in February was a clear signal that this point is still far away.
“For the Bank of England, this it was pretty awful,” Muhlbauer says. A tight labor market is another burden. “The Bank will be extremely wary of easing pressure and keeping inflation high.”
2903 inflation g7
Inflation will make it much more difficult for politicians to intervene and ease the burden on the housing market if values fall sharply.
After the global financial crisis, the Bank of England lowered interest rates. Then there was no inflationary pressure. “This meant that the drop in house prices that occurred then was relatively small and temporary,” says Mühlbauer.
With such high inflation today, the Bank is not considering this option. According to Muhlbauer, this downturn is more like the crisis of the early 1990s, when the Bank had a similar inability to cut rates.
Then the recession was less sharp than in 2008, but much longer. House prices have been falling for years.
Even if these particular risks are averted, the UK housing market must adjust to a painful new reality.
When mortgage rates reached 6%, Zoopla calculated that buyers' purchasing power was down 35% compared to early 2022. Today it is possible to get a mortgage loan of just over 4%. That means shoppers can spend 20% less than they did at the beginning of last year, says Richard Donnell, executive director of research at Zoopla. And this is the best deal on the market. The average two-year flat rate is over 5%.
It's cheaper to rent than to buy
36-year-old Robert Lewis is also buying a house in London with his partner and two children. Since they started looking for a home a year ago, the mortgage rate they can get has doubled. As a result, they moved their house hunting to a cheaper area.
But even that doesn't make up for the blow. “When we first started looking, one of the main motivations was to save money compared to our rent. Now, whatever we do, we will spend more on mortgages than on rent,” says Lewis.
The family's monthly rent is £3,500. Their mortgage bill will be £3,800, about £1,000 more than when they started looking for a house. “It means a different lifestyle than the one we're going to lead, a lifestyle where you have to worry about the bills,” says Lewis.
The real estate market is recovering from the mini-budget. , but he is adjusting to the new reality of constantly raising interest rates.
In October 2022, when mortgage rates soared following Kwasi Kwarteng's financial report, matched sales fell by a third from pre-pandemic levels in October 2022, according to TwentyCi. Since then, rates have come down and sales have rebounded. In March, they rose by 1.4% compared to the period of 2017-2019.
But these transactions are completely dependent on the price. Back in October, the share of sales that were reconciled after the price change rose just 2.5% from the pre-pandemic norm. In March, this share increased by 44%.
0904 Change in home sales volume agreed below the asking price
“Obviously it's price sensitive. Perhaps what you're seeing is sellers realizing that circumstances have changed, that buyers' budgets have become tighter and there's little point in waiting for the market to match their price expectations,” says Lucian Cook, Head of Residential Research at UK from real estate agents Savills.
The Halifax House Price Index surprised analysts when it reported a 0.8% monthly increase in house prices in March, meaning house prices were down 2% from their August peak. The monthly change was the exact opposite of the Nationwide index, which reported a monthly drop of 0.8%.
But this divergence likely reflects the fact that buyers are switching to different types of property, says Andrew Wishart, senior specialist on real estate. economist at Capital Economics. Both indexes are based on approved mortgages, which means they can only reflect the types of properties that each lender's clients buy.
“Average approved mortgages are down 9% as households cannot afford to take on the same amount at higher mortgage rates. Because the Halifax index, which is based on approvals, reports only a 2 percent price decrease, despite the fact that this suggests that homes for sale are less valuable, they will be smaller and located in cheaper areas,» says Wishart.
“Many of these movers are not desirable moves, they are not people who are fighting for the most expensive property they can buy. They are much better value for money, have common sense and make the right decisions,” says Donnell.
Higher costs mean that there is a clear differentiation in the market, and buyers are flocking to cheaper properties. Sales in the cheapest third of the market rose year-on-year in March across all regions of the UK, according to Zoopla. In the West Midlands and Wales, sales growth in this segment increased by 21%.
0904 Change in the share of real estate sold, March 2023 compared to March 2022
The top third of the market is an exact mirror image. Sales in this part of the market fell sharply in all regions, with declines in Scotland and the South East by 20% and 12% respectively. Sales also fell in the middle third of the market in all regions except Scotland and the North East, where growth was marginal.
“The housing market at the top is a bit slower to catch up with the post-mini budget. They have the most money, but equally, if they have the biggest mortgages, they pay the most interest on them. They need to be more careful about where the market is headed,” says Kesha Foss-Smith, regional director of real estate agency John D Wood in London.
A two percentage point change in mortgage rates would cost a homeowner with a £1m loan an additional £1,670 per month.
The city's regulator, the Financial Conduct Authority, has given generous leeway to lenders to help homeowners who are struggling with their mortgage payments. This includes options such as temporarily switching to interest-only payments without the usual availability checks.
Few analysts expect a large number of withdrawals. But the stress of higher rates can push people to sell out and move out long before they hit financial hardship.
And the data shows that more and more people are putting their homes up for sale. According to Zoopla, the number of properties listed for sale in one real estate agency branch increased by 65% in March compared to last spring.
A major rebalancing of supply and demand is currently underway. Shopper inquiries rose m/m in March with the start of the spring sales season, but they are down more than a tenth of the five-year average and are just over half the level recorded in March 2022.
0904 Demand has fallen but supply rises
BoE data show mortgage approvals rose 10% m/m in February. However, permits are still limited and, apart from the closure of the housing market in 2020, they are at their lowest level since early 2011.
In February, the asking price of 45% of homes listed on Zoopla was reduced at least once. . “I think sellers are getting the message. If you're serious about moving, you need to be realistic about the price. Homeowners have made so much money from the pandemic that they have a place to play, it's not like losing real money,» Donnell says.
«If you're a seller and you try to raise the price, you'll find there's no interest very quickly and you'll have to lower your price,» says Foss-Smith.
But years. supply shortages mean that buyers are eager to move when they can afford it. “The way the agents priced the houses never indicated the same price your neighbor sold for – you always tried higher. Now we look at what was sold last year and say let's price it a little lower and see what percentage we get,” says Foss-Smith.
Sellers also have much more room to cut prices than during previous downturns. From the start of the pandemic in March 2020 to the peak of the market in August 2022, the average house price jumped from £219,583 to £273,751, an increase of £54,168, or 25 percent.
“All the people they are sitting on big profits, and they will have to sacrifice a little,” says Donnell.
Embed Landlord exodus House Price Drop Tracking
The most motivated sellers are likely to be in the buy-to-let sector.
The tax changes announced by George Osborne and effective in April 2020 mean that landlords who own property in their own name can no longer deduct all of their mortgage interest from profit calculations for their tax bills. This means that even if their mortgage bills skyrocket, they will have to pay the same amount of tax.
These changes were a blow to the «dinner party landlord,» says Richard Rowntree, managing director of mortgages at Paragon, a buy-to-let lender.
While landlords with larger portfolios have tax benefits associated with using company structures, many small landlords who own one or two properties don't have the income to cover the higher costs, Rowntree says. Importantly, these small landlords make up the majority of the rental housing supply, he adds.
Real estate investors are slowly starting to sell off property as they adjust to higher mortgage rates.
“If your mortgage went from £400 a month to £1,500 a month and your rental income is £1,800, you still pay the same tax,” says Foss-Smith . “Especially in the lower end, these casual one- or two-bedroom landlords, they've certainly started to come into the market,” says Foss-Smith.
«We haven't seen as many as I think we expected, but I think many landlords haven't exhausted their flat rates yet,» she adds.
Now that home prices are falling, slightly fewer landlords lose their assets. Homes listed for sale on Zoopla accounted for 11% of homes listed for sale, up from 13.5% in 2022, but these numbers are still high compared to historical averages.
But many may be forced to sell when their fixed-rate deals expire, Donnell says. Another key factor will be the adoption of energy efficiency regulations for the private rental sector. The government will announce deadlines for the new minimum requirements for an energy efficiency certificate in the private rental sector at the end of the year.
Average Energy Efficiency Rating by Year Built
Those who leave are unlikely to find many investors willing to replace them, especially in London where high house prices mean lower returns.
In the first three months of this year, a typical rental in the capital required an investor to buy a deposit of 50 percent, or £257,000, according to Zoopla. A year ago, that figure was just £129,000. Gross rental income will be only 4 percent, which is quite low compared to what is offered to investors in the North and the Midlands.
A concentration of homeowner sales could lead to a larger drop in home prices in areas such as downtown apartment markets.
There is another group of sellers that could emerge en masse over the next few years,” says Donnell.
«We have the largest number with over 75 sellers The «year-old homeowners we've ever had. Their insurance bills are going up, council taxes are going up, and their electricity bills are going up. This is a group of people who have barely moved in the last few years and they're going to be a very important group in the housing market.» , says Donnell.
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