economic #aGENda 11.08 Property Special

Could the current combination of rising interest rates and inflation be the two straws that break the UK’s ever resilient property market’s back?

Straw 1: Interest Rate Rise

The largest hike in interest rates in almost 30 years will push up mortgage payments for millions of people by hundreds of pounds a year as experts warned of a rise in repossessions.

Last week’s Bank of England increase saw the base rate shoot up from 1.25 per cent to 1.75 per cent, the sixth consecutive rise in interest rates.

Further interest rate rises could see a surge in home repossessions as struggling households go into arrears on their mortgage repayments, industry analysts believe.

Three-quarters, or about 6.75m, of the just under nine million residential mortgages outstanding are on fixed rates, UK Finance figures show.

12% – around 1.1 million households – are on standard variable rates and the remaining 9%, around 800,00 homeowners, are on tracker rates.

Following the 0.5% increase, around two million homeowners on variable or tracker mortgages are set to see an automatic increase to their monthly payments.

Around 1.3 million homeowners on fixed-interest deals due to end this year and 1.8 million whose deals expire in 2023 are also braced for steep rises.

The average outstanding balance for a fixed-rate mortgage in the UK is £161,774. Fixed-rate mortgage holders whose deals are expiring, and who have to refinance on a higher rate after this announcement, face paying on average around £222 extra each month compared to last year, when interest rates were 0.1%.

A typical tracker mortgage holder with an outstanding balance of £121,034 will see their monthly payments rise by more than £50 a month, according to figures from UK Finance, which represents the banking and financial services sector.

The rise to 1.75% means average tracker mortgage repayments will have increased by £166.42 a month on average since December when the bank’s interest rate was 0.1%.

Comment

When rates were low, moving up the housing ladder didn’t seem daunting. Continued increases will slam the brakes on sizing up, so expect prices at the top end to falter first and hardest.

Straw 2: Landlords struggling to find loans

Landlords have been left scrambling for mortgages as lenders have pulled buy-to-let deals from the market as interest rates soar.

The number of available buy-to-let deals has plunged by a third since June as lenders withdrew 1,100 deals in two months, according to data from Moneyfacts, an analyst.

In July alone, the number of available mortgages fell by 14%. Experts warned that banks are ditching their best buy-to-let deals as rising interest rates squeeze their margins.

Rates on buy-to-let deals have rocketed in recent weeks. On August 1, the average rate on a five-year fixed-rate buy-to-let mortgage (across all deposit sizes) was 4.49%, according to Moneyfacts.

This was a jump of 1.33 percentage points from the 3.16% average rate at the start of February – an increase of 42pc in six months. Rates on two-year fixes jumped from 2.9% to 4.04% across the same period – a 33% increase.

As of August 1, there were 2,375 buy-to-let mortgage deals available, compared to 3,484 at the start of February.

There are early signs that the shrinking availability of good deals is eroding landlord demand, on top of the other challenges faced by investors. Until recently, record rent growth has brought landlords racing to buy despite the interest rate rises.

Analysis by Nationwide Building Society showed that buy-to-let mortgage transactions in May were at their highest level since November 2021. But commentators have observed that demand from property investors is now in decline. Buy-to-let mortgage searches in July were static compared to June, but down around 10pc compared to the highs in March.

Because lenders are ditching their least profitable deals, so-called “green” mortgages, whereby borrowers can get better rates for buying more energy efficient properties, are disappearing at a particularly fast rate.

Data from Mortgages for Business show that between May and July alone, the number of green deals for limited company borrowers fell by 42%.

Comment

The cost-of-living crisis will lead to increased missed payments as renters struggle to find extra cash for food and energy. There will be landlords that can’t afford to see their mortgage payments increase at one end and rental income falls at the other.

This will take time but will be the cause that sees prices falter at the lower end of the market

So where are UK property prices heading?

Last month, UK property prices fell by 0.1%.

Driven partly by the “race for space” and a trend for countryside living, property prices have soared in many areas of the UK since the start of the pandemic.

But last month, the average price of a home fell to £293,221 — representing a 0.1% decrease month-on-month, according to the latest report from Halifax. The report also showed that mortgage approvals have fallen for the past five months in a row, which could also indicate that housing market activity is cooling.

There has been an increase in fears we are heading towards a property market crash following the interest rate rise, but what do the experts think?

Whilst most commentators don’t believe we will see a fully-fledged housing market crash, they do believe that prices will start to fall further as the cost-of-living crisis worsens and inflation continues to rise.

With energy prices predicted to rise another 65% in October, people simply will not be able to afford the mortgage repayments on a lot of properties that they may have been able to manage previously.

July’s 0.1% decrease in average house prices doesn’t sound like much, but it’s hugely significant as it marks the first time in more than a year that prices haven’t increased.

For first-time buyers, the market is hugely daunting at the moment and until prices decrease, people would benefit hugely from something being reintroduced like the Help to Buy scheme.

There’s a real absence of support at the moment which is leading to people being reliant on the Bank of Mum and Dad in order to get on the ladder (see here for more details).

Comment

A market is simply a balance of supply and demand. A stockmarket crash is fast due to the liquidity. A panic can cause investors to run for the door, rapidly driving down prices.

Property is not like this. Panic selling can’t happen as the time constraints and costs will cause many who may want to sell, to rethink and just sit tight instead.

Homeowners are in this category; they can hunker down and get through this. They don’t need to sell. Their property in not an investment and they can weather the storm.

Its the ends of the spectrum that are most vulnerable. At the lower end, this could benefit those who struggle to get on the housing ladder. At the higher end, it may ultimately be HMRC who lose out through less IHT, so not a bad thing.