Mortgage rates reach the ‘tipping point’ of 5%
After a better-than-expected start to 2023, recent inflation figures and the subsequent Bank Rate rise have triggered an increase in mortgage rates, up from 4.5% to 5%-6%.
Our view remains that 5% mortgage rates represent a tipping point.
Once rates go higher than this, buying power is affected and we can expect to see annual house price falls and fewer homes selling.
Our Executive Director - Research, Richard Donnell, says: ‘Falling mortgage rates over H1 2023 boosted sales and led to firmer prices.
‘This is set to reverse in H2 as higher mortgage rates hit buying power at a time when sellers are having to accept larger discounts to asking prices.’
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Sales momentum recovers in the first half of 2023
Despite rising mortgage rates, the housing market is still busier than it was before the pandemic.
In fact, the total number of sales agreed in the first 5 months of the year recovered to within 2% of the 5-year average.
In the last 4 weeks, the number of sales agreed rose to 8% above the 5-year average, as people looked to move before mortgage rates increased further.
A strong employment market, with rising earnings and falling energy prices, had boosted UK consumer confidence, alongside mortgage rates falling towards 4%.
As sales volumes increased, so too did house price growth, sparking a reversal of the house price falls we saw at the end of 2022 and the beginning of 2023.
However, there are now early signs of a seasonal decline in demand, which is likely to expand over the summer.
What’s happening to house prices where you live?
While quarterly price falls have slowed, the annual rate of UK price growth has shown a rapid loss of momentum over the last year, slowing to +1.2%.
All areas of the UK are still experiencing positive house price growth, except for Northern Ireland (-0.8%), London (-0.2%), Cambridge (-0.2%), Belfast (-1.7%) and Aberdeen (-1.8%).
In Wales, house price growth is comfortably up at +2.5%.
In Scotland and the North-East, where housing is more affordable, and the capital, where price rises have under-performed, the number of new sales being agreed continues to run above the national average.
However, in the East of England, South-West, East Midlands and South-East, sales volumes remain at or below average.
These regions registered some of the greatest gains over the pandemic years. But they are now the places where house prices will need to adjust the most, as homes here become less affordable while higher mortgage rates are impacting buying power.
In the last 4 weeks, we’ve seen a 14% drop in buyer numbers compared to the 5-year average.
For the rest of 2023, we expect sales momentum to slow as higher mortgage rates hit buyers and squeeze more out of the market, bringing a return to modest quarterly price falls.
UK house prices remain on track to fall by up to 5% over 2023.
A third of sellers discount their asking price by 5% or more
Today’s buyers are driving a harder bargain on agreed pricing.
Sellers are having to accept lower offers that are, on average, 3.8% below the original asking price, according to our data business Hometrack.
We have also seen a jump in the proportion of sellers accepting bigger discounts.
More than two-fifths (42%) are accepting offers of more than 5% below the asking price - the highest level since 2018, when annual UK house price growth was just 1%.
And over 1 in 6 sellers are accepting discounts of more than 10% below the asking price, a level that remains more stable.
Surge in supply could drive larger price falls
A surge in the supply of homes for sale also increases the risk of house prices falling.
There are some signs that supply is starting to grow at an above average rate, with 18% more homes listed for sale in the last 4 weeks compared to the 5-year average.
The number of homes for sale is now back to pre-pandemic levels.
If this increases further, either through voluntary or forced sales, the boost in supply would give buyers further room to negotiate on prices.
Sellers must be very realistic on pricing if they want to move
The desire to move home isn’t all about aspiration for a bigger or better property.
We believe that rising living and housing costs will continue to keep owners reviewing their housing needs, with moving becoming the best option for some out of choice or necessity.
Whatever the motivations, the key message for anyone serious about moving in 2023 is the need to be very realistic on price, seeking the views and expertise of local agents as they plan their move.
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Outlook
The resilience of the housing market and homebuyers is set to be tested once again as mortgage rates increase over 5%.
Firmer pricing this spring shows 4-5% mortgage rates are manageable, but the longer
rates stay over 5% and closer to 6%, the more the increased hit to buying power will result in lower prices and sales volumes.
There is a large equity buffer to absorb house price falls, making the risk of negative equity much smaller than in previous downturns.
The bigger challenge for housing activity is the affordability of monthly payments for buyers and those remortgaging, set against the wider increase in other costs of living.
Household budgets are being squeezed and we look set for a prolonged period of very low nominal house price growth, which will see steady re-alignment of house prices and household incomes over the next 3-5 years.