The housing market has suffered from rising interest rates, and growth has seemingly come to a halt as a consequence of the Bank of England’s (BoEs) battle against inflation.
The latest house price data from the Office for National Statistics (ONS) showed house price growth remained subdued in May, with prices increasing just 1.9% in the 12 months to May, down from 3.2% in April.
Data from other house price indexes show similar findings.
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Rightmove said asking prices fell by £905 month-on-month in July. The Royal Institution of Chartered Surveyors’ latest market survey also contained bad news about the property market: new buyer enquiries have fallen as affordability concerns and high mortgage rates deter buyers.
House prices experienced spectacular growth throughout the pandemic, but that seems to have come to an end. Mortgage rates for two-year and five-year fixed deals are firmly over 6%, significantly higher than the 2% rates seen at the beginning of 2022.
As a consequence, more lenders are defaulting on their payments, according to the latest data from the Bank of England.
In the three months to June, lenders reported a 30% rise in mortgage defaults and have warned the figure could rise as homeowners grapple with skyrocketing mortgage costs.
The BoE's Credit Conditions Survey found the increase to be the largest rise in defaults since 2009, spurring concerns about the ability of homeowners to keep up with rising payment costs.
As the property market faces its biggest challenge in decades, will prices continue to fall?
WHERE WILL HOUSE PRICES GO IN 2023?
House prices experienced rapid growth throughout the pandemic thanks to a combination of stamp duty cuts, low-interest rates and the “race for space.”
However, the combination of rising interest rates and the cost of living crisis started hitting buyer confidence last year – and house prices have been falling since.
Halifax said the annual rate of house price growth turned negative in May for the first time since 2012.
And according to HMRC, the number of property transactions fell 25% in April year-on-year, following a bumper month in March.
The market is cooling down as buyers retreat due to increased mortgage rates, which have been rising on expectations the BoE will hike its base rate once more when it meets on 3 August.
The average two-year fixed mortgage rate is currently 6.83%, data from MoneyFacts shows while the average 5-year fixed mortgage rate is 6.34%.
The Office for Budget Responsibility (OBR) published a fresh forecast for the property market alongside the Spring Budget – saying it estimated prices would fall further than previously expected. The OBR now expects house prices to fall 10% by 2024.
Lloyds and Halifax expect house prices to fall 8% in 2023, while Nationwide and online estate agent Zoopla are predicting falls of 5%.
Rising mortgage rates are behind these downbeat projections.
WHY ARE MORTGAGE RATES RISING?
Lenders have been withdrawing mortgage products and some have been hiking their rates. The average two-year, fixed-rate mortgage for homeowners is now 6.75%, according to Moneyfacts - more than triple the average rate of 2% seen at the beginning of the year.
“The withdrawal of mortgage products and increasing rates by lenders over the past few weeks have been driven by a number of factors,” says Karen Noye, mortgage expert at Quilter.
“The prevailing reason for this shift is the higher-than-expected inflation rate of 8.7% in April fuelling predictions that the BoE will raise interest rates to a higher level than previously thought,” adds Noye. “This fear has made some of the big name lenders cautious and prompted them to withdraw products and then raise their rates to safeguard against future losses.”
The current climate does not seem very buyer friendly, especially as affordability becomes stretched due to rising prices.
“There’s every chance this will persuade buyers that this isn’t the climate to buy in,” says Sarah Coles, head of personal finance at Hargreaves Lansdown.
“At times like this, buyers may think there’s less risk in waiting to see what happens to rates and prices before taking the plunge. Given that rates are expected to remain higher for months, this could seriously dent the market as we go through the rest of 2023.”
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