According to the Royal Institution of Chartered Surveyors, inquiries from potential home buyers reached a low point last month, indicating a decline in UK home sales. This trend was further reinforced by Barratt Developments’ trading update, which reported a significant decrease in reservations from first-time buyers compared to the previous year. Additionally, Winkworth, an estate agent, expressed concerns about declining profits due to a slump in housing market activity.
These developments reflect the expected outcome when buyers are grappling with the impact of significantly higher mortgage rates. The housing market is experiencing a substantial slowdown, although Barratt noted that demand from existing homeowners remains more resilient. Moneyfacts data reveals that the average two-year fixed mortgage rate has risen to 6.66%, the highest in 15 years.
Nevertheless, it is intriguing that house prices have only fallen by about 4% so far. This seems like a relatively mild response to the significant shift in buyers’ affordability. Two key factors contribute to this nuanced picture compared to previous housing market downturns. Firstly, we are not currently in a recession, and even if one occurs, it is not expected to be as severe or prolonged as the aftermath of the 2007-08 financial crisis or the early-1990s slump, both of which led to notable decreases in house prices.
Secondly, most forecasts do not anticipate a sharp rise in unemployment this time around. In fact, earnings growth has surged by 7.3% in the three months leading up to May compared to the previous year. Consequently, major banks are not overly concerned about default rates and support the government’s approach of showing leniency to struggling mortgage holders.
However, considering the context, the housing market still appears fragile. Over the past decade, we have experienced record-low interest rates, government assistance through schemes like help-to-buy, and a surge in demand due to stamp duty holidays during the COVID-19 pandemic. Even if the increase in mortgage rates had been more gradual, the market would have been stretched from a historical perspective. At its peak, the price of houses, expressed as a multiple of average earnings, reached seven times, surpassing the levels seen during the peak of the 2007-08 financial crisis.
Currently, a 10% deposit on a typical first-time buyer home equates to approximately 55% of gross annual income, according to Nationwide’s calculations. While this figure has decreased from the all-time high of 59% reached in late 2022, it still remains slightly above the levels observed in 2007-08. In theory, higher interest rates should make it easier to save for a deposit (once banks pass on the changes); however, surging rents, energy bills, and general inflation make this task nearly impossible for most individuals.
Overall, the housing market is expected to experience further price declines. However, it is unlikely to be another era-defining crash as that would require a more severe recession. Capital Economics has forecasted an additional 8% decline in house prices over the next 12 months, bringing the total drop from the peak to 12%. It is evident that there is still a significant journey ahead in the housing market.
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