Future of UK Housing

Martin Mockler, Partner at Evans Mockler: UK Property Prices to Face Significant Challenges In 2023 (But The Future Looks Bright)

We may look back on the mini budget of Friday 23 September 2022 as the high-water mark for property prices in the UK for a period to come. Immediately after the now reversed budget was announced, financial markets reacted with shock at proposed tax cuts to be funded by more borrowing by UK plc. This shock translated into a surge in borrowing costs which, combined with a likely slowdown in economic growth, threatens to trigger a softening in the UK housing market.

The most recent government data showed that just under two-thirds of 24.7 million dwellings across Britain were owneroccupied, with 8.8 million homes owned outright and 6.8 million owned with a mortgage or a loan.

Interest Rates

Several lending institutions temporarily paused selling mortgages to new customers, while many others ramped up repayment rates for new loans. These rates potentially overstretch millions of existing homeowners and may make new mortgages unaffordable for many others.

Mortgage deals for new customers currently feature fixed rates at around 5%-6% which is a steep increase from the norm of around 2% for the last five years. This increase has prompted rising concern of a fall in the property market.

Historically low interest rates since the 2007/08 global financial crisis, and a low supply of housing stock, have fuelled the doubling of the average price of a British home to £292,000 from just £154,000 in 2009.

That fed a sense of affluence which in turn buoyed consumer spending and underpinned wider growth in the economy. The risk is this could unravel if the unintended consequence of the Truss/ Kwarteng bid to turbo-charge economic growth with tax cuts ends up forcing the cost of borrowing higher.

Exposed

A Fitch Ratings study in July identified Britain as among the most exposed globally to a rise in borrowing costs because of the relatively high debt-to-income levels accepted by homeowners and its high proportion of loans on variable rates.

Even among those who did fix their repayment rate, some 1.3 million borrowers are due to reach the end of their fixedrate term this year, according to an analysis by UK Finance and Accenture published before the most recent rate rises.

Where repayment rates finally settle depends on shifts in debt markets plus the overall cost of borrowing set by the Bank of England - with money markets now expecting that to hit almost 4% by the middle of next year from 2.25% today.

The forecast increases in the cost of borrowing comes on top of a cost-of-living crisis driven by rising food and energy prices which is already biting many hard.

THE HOUSING MARKET IN THE UK IS NOTORIOUSLY DIFFICULT TO PREDICT.

Call for Calm

Beyond the immediate squeeze this will have on consumers ability to spend, rising borrowing costs also have the potential to send the years-long house market rally into reverse. HSBC analysts predict house price falls of 7.5% into next year.

Some top mortgage lenders are calling for calm, stressing they are still signing mortgage deals. They also state that the pullback in lending among smaller rivals is in no way indicative of a broader, exodus of lenders from the mortgage market.

The mortgage market may remain in limbo in the coming weeks as investors watch currency markets and how the Bank of England reacts. Assuming the pound stabilises, and the Bank of England avoids an emergency hike, banks can resume lending with some degree of confidence in their cost-of-funds modelling.

The Future

Predicting how the housing market will behave is notoriously tricky. However, we do know that a strong economy combined with wage inflation leads to rising property prices over time. According to a report in the Guardian from 2014, an average flat in central London could cost £36 million by the year 2050 assuming average annual price increase of 9%. This may sound ridiculous, but if you study the market in the capital over the last four decades, a similar increase has already taken place.

Perhaps £36 million is a little high, but prices will certainly grow to incredible levels by the middle of this century and any reduction in values next year should only be a bump in an otherwise rising road.