We have come to regard house price inflation as part of the natural order of things.
We know that house prices can fall, but we expect them not to.
After all, previous forecasts for house price falls during the pandemic simply never materialised, and if anything the crisis marked the beginning of a round of increases. But the outlook for 2023 might be different – apart from anything else, it looks as though a price downturn has already begun.
At Continuum we are asking how soaring rates will affect the market and what will really happen to house prices in 2023?
What will happen to the housing boom?
15 years of cheap borrowing have come to an abrupt end. In January 2022, the average two-year fixed mortgage rate was 2.34%. A year later, it might be as high as 6%, almost three times higher.
The current level of house prices was sustainable with mortgage rates below 2%. When rates approach 6% it is not.
Mortgages which once fitted easily into household budgets have become overwhelming. Some people may find that they struggle to afford big mortgages, or pay inflated house prices any more. Logically, prices will fall as a result. But the key question is how much and how fast?
Looking at the figures
Higher rates make existing mortgages much harder to afford. Around 1.8 million homeowners will come to the end of fixed-rate mortgages in 2023.
Those people potentially could face much higher interest rates and subsequently higher payments when they re-mortgage, meaning that some may need to consider whether or not they need to sell up.
There could be a sudden flood of house sales. But there may be a reduction of people able to buy. A jump in mortgage rates from 2% to 6% could reduce the amount a typical home buyer can borrow. Affordability checks will become even harder to pass.
While it is too soon to see big falls in price indices and sales figures, there are indicators that show a clear downward trend. Mortgage approvals may be down, and estate agents report that the annual Christmas slowdown in the market is deeper and longer this year.
It is possible to put some figures to the effect of increased mortgage costs. The monthly cost to service an 80% loan-to-value mortgage on the average priced house has historically been around 40% of an average income. With mortgage rates at 6%, that figure is now about 60%.
But if price falls are inevitable, how large will they be?
There are – as usual – several very different opinions.
How the experts see the market
Pessimists may point out that between August and November, the average UK property shed £9,963 in value – a drop of 3.6%, according to Nationwide.
Those with a more optimistic view point out that the annual price increase is still positive in almost every part of the country, and that trimming off a couple of months of growth is a healthy correction, not a market crash.
Britain’s largest mortgage lenders the Halifax and the Nationwide are predicting UK house prices will fall in 2023, by 8% and 5% respectively – although this drop would not be sufficient to wipe away all the gains made in recent years. According to Halifax, the average house price increased by 23 %, or nearly £55,000 in cash terms, between March 2020 and August 2022. An 8% fall would simply place the average property price back at roughly the level it was in April 2021.
There are of course sensationalists who predict drops of 25% or more if interest rates continue to go up, but the markets have settled since the panic of the Kwarteng/Truss minibudget. The big interest rate hikes may no longer happen.
There are actually several pieces of good news.
- About 35% of property hunters buy in cash and are not directly affected by interest rates.
- Lenders apply stress tests to borrowers, helping ensure mortgages are affordable even when rates increase. If things go wrong they will work with borrowers to apply forbearance rather than repossession.
- The Financial Conduct Authority has already planned guidance that will include letting borrowers switch temporarily to interest-only payment plans.
- The shortage of housing – coupled with a jobs market that looks set to remain buoyant – will tend to help preserve market value.
The most positive news of all?
At Continuum we can search the entire lending market to help you find solutions to your mortgage needs, whether you are looking for a remortgage to cut your monthly outgoings or need to find the best deal to buy the home you want.
Whatever direction the housing market takes, you could be better off by calling us.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable mortgage strategy, you should seek independent financial advice before embarking on any course of action.