This time last year the housing market was flying. Demand for home loans was strong and mortgage lenders were vying to offer the most attractive deals. House prices were up 12.5% year on year, according to the Halifax.
The mood is now different. This week, the Halifax and the Nationwide building society announced that fixed-rate mortgages would become more expensive. HSBC has temporarily withdrawn all its deals for new borrowers.
House prices have started to fall. The Halifax’s monthly report on the state of the market showed that after peaking in August last year the average cost of a home has dropped by £7,500 to £286,500.
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That decline needs to be put into context. Even after the falls since the summer of 2022 the average house price is still £25,000 more than it was two years ago. Negative equity – a home worth less than the remaining balance of the mortgage – is still a rarity.
Even so, the property industry is braced for further falls. New housebuilding has dropped sharply because contractors can see little point in starting new homes when demand is likely to remain weak. Annual house price inflation, according to the Halifax, has just turned negative for the first time in more than a decade. The big question is not whether prices will continue to drop but how big the drop will be. The rating agency Moody’s is pencilling in a fall of 10% over the next two years.
Adjusted for inflation the drop would be even bigger. Any drop comes against a backdrop of stubborn cost of living pressures. Annual inflation is running at 8.7% and – on Bank of England forecasts – will still be running at 3.5% next spring. That suggests the real – inflation-adjusted – fall in house prices could be about double the nominal fall: of the order of 25% if Moody’s forecasts are accurate.
Much will depend on what the Bank of England does with interest rates. A month ago, estate agents had been hopeful that the property market was stabilising after the shock administered by Liz Truss’s short-lived government last autumn. Inflation was set to tumble, raising hopes that the Bank would call a halt to a series of 12 interest rate increases that had taken the official cost of borrowing from 0.1% to 4.5% over the course of 18 months.
In reality, that was always likely to be an overoptimistic view. It takes time for past increases in interest rates to work their way through the economy and the Bank estimates that only about 30% of the pain from the jump in rates to 4.5% has so far been felt by consumers.
Inflation duly came down from 10.1% to 8.7% in April, but the fall was smaller than anticipated, and core inflation – which strips out food and energy costs – actually rose. Markets are now pricing in at least three further 0.25 percentage-point increases from the Bank of England by the end of the year. Rate cuts are not expected until the second half of next year.
Kim Kinnaird, the director of Halifax mortgages, said the prospect of higher interest rates from the Bank had meant fixed mortgage rates were rising again across the market.
“This will inevitably impact confidence in the housing market as both buyers and sellers adjust their expectations, and latest industry figures for both mortgage approvals and completed transactions show demand is cooling. Therefore, further downward pressure on house prices is still expected,” she said.
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Mortgage rates are now approaching levels reached last autumn, and the financial pain for those affected will be considerable. About 1.4 million homebuyers have fixed-rate mortgages that expire in 2023, and more than half of them fixed in 2021 when mortgages were available at 2%. They will be refinancing at getting on for three times that rate. Earlier this week the retail financial products data provider Moneyfacts said the average rate on a new two-year fixed mortgage was running at more than 5.8%. The cost of servicing a typical £200,000 home loan has increased by £60 a month since the start of May. Spending on other items will inevitably suffer.
Property insiders are doing their best to be upbeat. Tom Bill, the head of residential research at the estate agents Knight Frank, predicted a 5% drop in house prices this year but said the market was coming back to earth, not falling off a cliff.
Iain McKenzie, the chief executive of the Guild of Property Professionals, said there had not been the dramatic contraction some predicted. “People need a roof over their head and the UK is not building enough homes, so there will always be demand,” he said.
Much hinges on whether unemployment remains low. If it does, the soft landing that the optimists are hoping for may materialise. If it doesn’t, prices will fall by a lot more than 5%. Either way there will be no pre-election feelgood factor from the property market for the government. The boom is over.
