Demand for homes in London continues to lag the rest of the country due to pandemic and affordability-related factors with annual price inflation (4.1%) less than half the UK average.
Further data from Zoopla revealed that UK house prices increased by 8.3% or £19,800 in the past 12 months. The South West and Wales are jointly the best performing regions, with annual house price growth of 10.6%.
Strong demand and healthy volumes of new sales agreed in the first half of the year continue to support the headline rate of growth.
New sales agreed remain in line with last year while stock levels have started to rebuild off a low base, boosting choice for buyers. The average UK estate agent has 14 homes for sale, up from a low of less than 12 in the spring but below the pre-pandemic level of 20.
Buyer demand is registering the usual summer slowdown and under performing last year, as economic uncertainty increases.
Higher mortgage rates to impact demand over H2
In January 2022, new mortgage rates were still ultra cheap at less than 2%. This has now jumped to 3.5% and is set to reach 4% as we move into the autumn. This level of mortgage rates is still low by historic standards, but homebuyers have become used to very low mortgage rates, meaning any reversal is likely to have some impact on demand, especially when combined with cost of living pressures.
Impact on first-time buyers and renting vs buying
Higher mortgage rates increase the monthly cost of repayments for all new home buyers. First-time buyers are the most sensitive group, alongside existing owners looking to buy a bigger home using more debt, and therefore extending the size of their current mortgage.
The impact will be less for those downtrading or moving to a similar-value home with the mortgage carried over – ‘ported’ – at the same rate.
Higher mortgage rates for FTBs mean larger monthly repayments and the need for a greater household income to meet the increased costs. The chart below shows the income to rent and buy a typical rented home at 2% and 4% mortgage rates.
Moving from a 2% mortgage rate to 4% means the average FTB will need an extra £12,250 in income, compared to when rates were lower. In London, the highest value market, this increases to over £34,500. The increase is less than £6,000 in markets with lower house prices.
The headwinds for the sales market are building but the market is in a much better place to weather these than during previous economic cycles. History shows that it is the sudden changes in levels of spending on housing that is most closely linked to changes in house price inflation and sales volumes.
The downsides for prices and sales are most common during recessions when consumers need to rapidly adjust what they spend in response to unemployment or higher mortgage rates. A high proportion of today’s mortgagees are on fixed-rate loans and stress-tested to see if they can afford a rate of up to 7%. This has baked resilience in the market that will limit the downside for prices.
That said, it’s clear UK households are facing a squeeze on incomes and living standards on multiple fronts, which will filter through into housing market activity and house price growth into 2023.
The primary risk remains in further increases in the base rate in order to control inflation, which will have a knock-on impact on mortgage rates. The higher rates move above 4%, the greater the impact on prices and sales volume and where homeowners have plenty of equity to cushion any future price falls.