31 October 2023 – While the property market has shown a lot of resilience in the past months, it appears that high inflation and mortgage rates are starting to bite. New data shows that house sales are down by 23% this year, compared to last year.
When mortgage rates first started to climb last year, many property industry insiders expected a slowdown of the market to follow suit. However, demand stayed relatively stable and driven by a supply shortage, house prices kept rising.
Last year, house prices have grown by 9.2% compared to the year before that. Today, year-on-year house price growth stands at -1.1%. The last time house prices have fallen at such a steep rate was over 10 years ago during the financial crisis.
And while demand has kept up, latest data from property portal Zoopla shows that house sales are down by 23% in 2023 compared to last year.
House Prices Fall Across The Country
In previous months, house prices were mostly falling in the south of England, where house prices tend to be higher than further north. However, Zoopla’s latest House Price Index shows that high mortgage rates and the ongoing cost-of-living crisis is starting to impact on other areas too.
While six months ago only 1 in 20 housing markets had reported house prices falling, now 4 in 5 are impacted by a drop in house prices.
The property portal’s data shows that the commuter towns around London and the South East of England have seen the biggest price drops, with -3.5% in Colchester and -3.3% in Luton.
There are still pockets where the market is more buoyant. In Halifax in Yorkshire house prices have risen by 3.6%, the biggest increase in all of the UK. Across the country 1 in 5 markets have reported an increase in house prices rather than a drop.
For now, house price falls are in low single figures, rather than a steep fall. However, while house prices haven’t seen a huge impact of worsened affordability, transactions have.
House sales are down by 23% in 2023 compared to last year. And Zoopla doesn’t expect this to change much next year, predicting 1 million house sales in 2024.
The property portal forecasts house prices to fall by 2% next year, if mortgage rates fall to 4.5% by the end of 2024. But even if mortgage rates fall below that, Zoopla thinks this would have more of an impact on transactions than prices.
Cash Buyers Draw Level With First-Time Buyers With Mortgage
While first-time buyers with a mortgage are set to be the biggest buyer group in 2023, with 33%, cash buyers are coming close behind with 32% compared to last year.
The share of cash buyers has increased by 12% compared to the five-year average. The number of first-time buyers and existing homeowners has fallen comapred to the average between 2017 and 2022.
Cash buyers who own their own home weren’t impacted by rising mortgage rates as much and are able to be more realistic on price. With rents continuing to rise, Zoopla expects first-time buyers to be pushed to buy their own home rather than stay renting in 2024.
It is expected that these two groups together will support the number of transactions next year.
The group the most impacted by high mortgage rates are upsizers. Moving into a bigger home means a bigger mortgage. There is also the risk of their home losing value when prices fall, which could mean they aren’t able to afford the bigger home.
To encourage this group back to market, mortgage rates will have to fall. However, forecasts predict that mortgage rates will stay higher for longer, which means upsizers will have to consider their position carefully.
Some are likely to wait for more favourable conditions, others will have to adapt their wish lists to enable them to move.
During the pandemic, house prices have increased by over 20%, due to sky-high demand caused by the pandemic and the stamp duty holiday in 2021. Last year, the market suffered from low stock levels, that further pushed up the price.
As a result, we ended up with a situation where many first-time buyers were priced out of getting onto the property ladder. Add to this soaring mortgage costs, and it’s not difficult to see that owning a home becomes an option for fewer and fewer people.
In our opinion, what the property market needs is a complete reset. House prices have to fall by far more than the 2% or so most industry experts predict.
This might not be a popular opinion with homeowners, but the fact that house sales are down by 23% shows that the current price level is just not sustainable.
Especially, because it is unlikely that mortgage rates will fall back to the extremely low levels we have seen before the pandemic.
The still ongoing cost-of-living crisis and record high rent prices make it impossible for many first-time buyers to save money. In particular, because the amounts needed for a deposit have risen with the prices.
For a housing market to work, buyers must be able to afford what’s on offer. This is currently not true for many people. We believe we shouldn’t be afraid of the market adjusting itself by house prices falling.