The macro backdrop for the housing market has evolved rapidly over the summer, with rising interest rates and increased energy costs fuelling the cost-of-living crisis. Yet, despite these challenges, these factors have yet to impact leading indicators of sales market activity.
The strong start to the year has carried the momentum into the summer and as we enter the autumn selling season, demand for housing continues to soften. UK- wide demand remains 8% above the 5-year average, supported by strong buyer interest in affordable markets, such as Scotland. All other regions have demand in line with the 5-year average.
The government has responded with tax cuts and an energy price cap to support housing demand. Changes to stamp duty will boost some segments but the recent spike in borrowing costs is set to push mortgage rates higher.
Rising mortgage rates are set to impact buying power
Most new loans are at fixed rates and the cost to secure financing for these mortgages does not directly follow base rates. These costs have surged recently, and mortgage rates are on track to reach 5% by Q4 - more than double the rates at the start of 2022.
Zoopla's analysis shows that if mortgage rates rise from 2% to 5%, buying power will be reduced by as much as 28%, assuming buyers want to keep monthly repayments unchanged. This will impact housing demand into 2023 for the 7 in 10 buyers using a mortgage unless they: put down larger deposits; or allocate more income to mortgage costs; or adjust their budgets, buying smaller properties or looking to cheaper areas. A fourth option is to sit on the sidelines until the outlook for borrowing costs becomes clearer.
Pandemic impact: 10 years of house price growth compressed into two years
Houses in Wales have recorded a 27% jump in prices since the start of the pandemic. This is the equivalent of 10 years of pre-pandemic growth compressed into just over two years. A similar pattern has been seen in the North East and Scotland, largely due to below-average price growth since 2009. Across other areas and property types, recent price growth has been the equivalent of four to five years, highlighting how much prices have jumped ahead.
Asking price reductions rise to pre-pandemic levels
There are early signs of price sensitivity from the scale of reductions in asking prices of homes for sale. Sellers want to maximise the value of their homes and when house prices are rising quickly, agents need to anticipate the strength of demand and price ahead of the market as needed. However, when demand starts to shift, agents and owners need to adjust as well.
There has been a clear upward trend in the proportion of listings which have had asking prices reduced by 5% or more over the spring and summer. The latest data shows that 6% of homes listed for sale have seen the asking price adjusted downwards. This is the highest level since before the pandemic, although re-pricing is a common seasonal trend as we enter the autumn market. Given the economic backdrop, we see this as a move to more of a buyer’s market after two years of a red-hot sellers’ market.
Right now, there are no big variations in price adjustments by region or property type. The adjustments are to be expected as the market transitions from one where demand greatly exceeds supply. They are not precursors for big price falls but indicate the rate of price growth will slow more rapidly in Q4 and into 2023.
Any homeowner wanting to sell their home in Q4 or early 2023 will need to price at the right level to ensure a sale. Sellers need to shift their mindset, giving more consideration to local market dynamics and the types of buyers for similar-sized properties in the local area.
While rising borrowing costs will see demand weaken in the coming weeks, Zoopla says that it expects the ongoing pandemic impacts and cost-of-living pressures to continue to stimulate homeowners to want to move home. Those who are relying on taking a large mortgage will be most impacted by rising borrowing costs which is most likely to impact buyers in southern England. The changes to stamp duty will support demand in lower-value areas.
Stamp duty
The key changes in the government’s recent mini-budget were to take all sales in England and Northern Ireland under £250,000 out of stamp duty (up from £125,000) while extending the additional relief for first-time buyers. The increase in this threshold takes 43% of homes out of stamp duty, primarily boosting regional markets. In many cases, the proportion of homes that are exempt will more than double - to deliver savings of up to £2,500 per sale - see right side of the chart. This has much less impact in southern England as prices are higher.
The new changes provide the greatest boost to FTBs in southern England who will get new savings of up to £10,000 per purchase. The left side of the chart shows that FTBs will get full or partial stamp duty relief on 68% of homes in London rising to over 80% across southern England. Zoopla expects this to boost demand from FTBs but rising mortgage rates may ultimately offset the boost from lower stamp duty costs.
South East England continues with high stamp duty costs
While any changes that reduce the costs of buying a home are welcome, the changes in the budget do little to reduce the 90% stamp duty paid on homes over £250,000. This buyers’ tax remains a big cost for existing homeowners buying a property in the South East of England, particularly in the £500,000 to £925,000 price range, which accounts for a sizable proportion of sales. Zoopla suggests that the budget was a missed opportunity to remove barriers to sale at this end of the market where higher mortgage rates will also have a greater impact on demand.
Richard Donnell, Research Director, Zoopla, comments: “Stamp duty changes are welcome and will boost some sectors of the market but, overall, they are unlikely to offset the impact of higher mortgage rates on housing activity”
Kevin Roberts, Managing Director, Legal & General Mortgage Services, comments: “Today’s data shows that it will take some time for the full effect of wider macroeconomic factors to be felt by the UK housing market and we may have to wait a while before we can gauge the true impact of recent announcements and market reactions. The current volatility also makes predicting the future trajectory of house prices extremely difficult. There are of course a range of downside factors and alarmist headlines at the moment, but Stamp Duty cuts will help some, and prices will remain supported while demand still outpaces supply.
“Current market pressures will be of great concern borrowers, and many will be anxious about what the future holds for them. Similarly, brokers are still navigating a rapidly shifting market that is being affected by rapid product withdrawals and repricing. In this environment it’s important that lenders communicate as clearly and often as they can to keep advisers up to date. Good advice will be invaluable for worried borrowers, so it’s vital that advisers get the support they need to be there for their customers.”
Matthew Thompson, Head of Sales at Chestertons, says: “As interest rates are increasing and lenders are adjusting their affordability calculations, buyers who have not yet found a property may be facing a change in what they can afford. As a result, many house hunters will be required to review their initial budget, whereby rising utility costs play yet another important factor to take into account. To still find a new home before further interest rate hikes, many of London’s house hunters will see no other option but to compromise on property location and size. Inevitably, this could lead to some buyers deciding to compromise on the type of property they initially set out to buy.”
