As the cost of living crisis and high mortgage rates continue to burden homeowners, buy-to-let investors, and first-time buyers across Britain, properties are being listed at prices significantly lower than their pandemic-era selling prices. However, the challenges are far from over, and the mortgage market will exacerbate them substantially.
Despite the slower-than-anticipated reduction in inflation rates, the Bank of England still has to foresee lowering its official rate, which means that lenders will maintain high mortgage rates. According to some economists, this could result in a gradual decline in the property market, similar to the downturn experienced in the early 1990s, rather than the abrupt but brief crash seen in 2008.
Nationwide’s seasonally adjusted index indicates that house prices in March were 4.6% lower than their peak in August. However, the figures for sales that are not adjusted for seasonal variations are more dramatic, with the average UK home selling for £273,751 in August, dropping to £257,122 in March, a decline of 6% or £16,629.
Pragmatic individuals now dominate the British property market. Homeowners who don’t need to sell have withdrawn their properties from the market, leaving sellers who need to move or dispose of rental properties willing to compromise some of the gains they made during the pandemic frenzy.
The critical question is not the current state of house prices but their future direction. According to analysts, expensive homes bought with large mortgages will soon feel the market downturn’s impact. Buy-to-let landlords, who can no longer offset mortgage interest against profits, are also more inclined to sell, potentially depressing prices further when the market becomes saturated with ex-rentals.
It presents a looming potential threat to the mortgage market. UK banks have substantial portfolios of government bonds, also known as gilts. Bond prices fluctuate as the financial system creaks under the pressure of rate rises. “Banks’ portfolios have shrunk, which means their balance sheets become more constrained,” says Muellbauer.
House price falls, which will also hit the value of their portfolios, will add even more strain. “Putting all of that together, I think banks are going to be extra cautious, and their lending criteria will be tougher in the coming 12 months,” says Muellbauer.
The British housing market faces a greater vulnerability to higher mortgage rates than other European markets. The International Monetary Fund reports that from 2021 to 2022, debt service repayments rose by an average of 33% across the continent, while in the UK, the increase was 70%. The high debt-to-income ratios in the UK and substantially higher mortgage rates than in other European countries contributed to this disparity. Additionally, British homeowners are more susceptible to fluctuations in interest rates.
Although British borrowers enjoy more excellent protection against higher interest rates compared to countries like Sweden, where most mortgages are variable-rate deals tied to interest rate fluctuations, this safeguard is only temporary.
Fixed-rate deals in the UK are often only short-term deals lasting two or five years, unlike in the US, where buyers fix for 30 years. Many existing homeowners will still get hit when their fixes expire, as will happen for 1.4 million borrowers across 2023.
