The week of 12 June 2023 appears to mark a significant turning point in the market. Despite facing numerous challenges, the market has defied the odds and continued to rise. However, the current state of the mortgage market is causing serious concerns. With products being withdrawn and repriced higher, it poses a threat to this fragile market even before the Bank of England confirms a rate rise. While the financial penalties may seem small at the moment, the impact on confidence is causing many to question whether it’s the right time to buy.
Adding to the mounting concerns is the increasing stock from landlords exiting the market and the plummeting demand for buy-to-let properties. These factors combined create a potential perfect storm.
Although there are reasons for optimism, such as declining inflation and sensible lending practices reducing the risk of mass repossessions, it’s prudent to quietly prepare for the worst. Aspiring home buyers, landlords, and property owners should brace themselves for another round of interest rate hikes, just when many believed the worst was behind us.
With stubborn inflation hovering near nine percent, far from the two percent target, a Bank of England rate increase may be on the horizon. Mortgage lenders have already begun preparing for this by pulling existing mortgage deals and introducing higher-cost offerings. As a result, a £250,000 mortgage is now approximately £400 more expensive than it was a year ago.
While the headline drop in prices has been modest, around 3 percent so far, the reality is harsher for sellers. Those with urgent reasons to sell, such as divorce, probate, or financial difficulties, may find themselves struggling and forced to make further reductions.
Looking ahead, it’s challenging to foresee any factors that could halt the decline of UK house prices. With average prices failing to keep pace with general inflation, it can be argued that property has already experienced a significant loss in value. The coming months may witness further price drops, potentially eroding a few percentage points or more by year-end.
The recent prediction by Moody’s Analytics of a 10 percent drop over two years seems increasingly likely. This raises concerns not only about homes being worth less than their initial purchase price but also about the prolonged period of difficulty predicted ahead.
Many homeowners are already facing difficulties meeting their monthly commitments, often relying on savings to get by. Once these savings are depleted, the specter of mortgage arrears and repossession may resurface.
Another pressing issue is the slump in house building. The softening demand has greatly impacted housebuilders, aligning with the Bank of England’s objective to curb inflation. Reservations, sales, construction numbers, share prices, and sale prices have all entered negative territory for most housebuilders.
For instance, this month Bellway reported a significant 25 percent year-on-year decline in reservations. This downturn does not bode well for the overall property market in the UK.
As housebuilders revert to their natural instincts, they will prioritise building only when they can sell. To maintain profit levels, they will cherry-pick development sites while leaving others for better times in the future. Even during recent boom times, the nation has struggled to meet the ambitious government target of constructing 300,000 new homes per year.
Unfortunately, we cannot rely on a thriving sales market to drive the construction of new homes, potentially exacerbating the shortage of affordable and safe housing options. If this trend continues, the shortage of homes available to rent or buy is poised to become even more severe.
As we ponder whether this week will be the catalyst for significant changes, only time will provide the answer. The days and weeks ahead will unfold the true impact of these market dynamics.