4 July 2023 – The latest figures from HMRC confirm that the market is cooling, with the number of sales falling by 25% compared to May 2022.
While often house prices are seen as an indicator for how the property market is doing, the number of transactions is a better way to judge the health of the market.
And new figures from HMRC have shown that the non-seasonally adjusted number of sales has fallen by a quarter this May compared to the year before. This indicates that the housing market continues to slow down.
However, compared to the number of transactions in April this year, May has actually performed better. Sales this month were up by 10% this month compared to last.
Based on seasonally adjusted figures, sales figures have fallen by 27% compared to May last year and 3% compared to April this year. Crucially, sales are also 20% down compared to pre-pandemic levels, signalling the slowdown of the market.
Inflation And Rising Mortgage Rates To Blame For Falling Number Of Sales
While a drop in transaction at this time of the year is not unusual, the economic situation is likely to have an impact on people’s willingness or ability to move.
Since the Bank of England (BoE) has raised the base rate to 5% last month, many lenders have increased their mortgage rates. As a result, many mortgage products have exceeded 6%.
After HSBC and TSB have increased their rates a few days after the BoE announced the rise of the base rate, the biggest UK lender, Halifax, and Nationwide Building Society followed suit last week. Both raised their mortgage rates for new deals.
While Nationwide and TSB raised their fixed rates by up to 0.35%, HSBC increased the rates by up to 0.55%.
The BoE raised interest rates after inflation remained at 8.7%, which was a surprise for many experts, who expected inflation to fall.
The combination of high inflation, which causes rising prices, and increased mortgage rates means that many buyers are no longer able to afford to buy. This results in the number of sales falling.
This highlights the slowdown in the residential market and that the housing market is softening rapidly due to inflation, flat GDP and rising interest rates taking their toll on purchasers.
Stacy Eden, Partner and Head of Real Estate at RSM UK
While house prices have also fallen in June, the market is not in free-fall. However, a fall in transactions is likely to impact on house prices.
Economist Predicts House Prices To Fall By 13%
Most commentators are expecting that house prices will fall this year, due to inflation remaining stubbornly high, which causes interest rates and therefore mortgage rates to go up.
With affordability becoming a problem for many potential homebuyers, demand from buyers who need a mortgage decreases. This in turn, will add downward pressure on house prices.
However, with unemployment rates not rising, a crash of the market is not expected, rather it will slow down gradually.
The high share of fixed-rate deals and a limited rise in unemployment mean we still expect the downturn to be more of a slow puncture, with prices falling steadily over a couple of years, rather than a sudden, sharp drop.
Andrew Goodwin, Chief UK Economist at Oxford Economics
In their latest House Price Index June 2023, Rightmove has said they still predict that house prices will fall by around 2%. However, this forecast was released before several lenders have raised their mortgage rates again. It will be interesting to see what their predictions are in their next forecast.
Even if house prices fall around 13% in the next two years, they will remain above pre-pandemic levels, as house prices have risen over 20% since the pandemic turbocharged the housing market.
While many homeowners might be concerns about what will happen to house price values, first-time buyers will welcome a decline in house prices. Affordability has worsened for some time now for them.
However, first-time buyers have a huge incentive to get onto the property ladder with rents being at record highs. Average rents in the UK have recently exceeded £1,000 per calendar month.
Rightmove’s latest House Price Index, which was released last month, has shown that buyer demand was 6% higher than in the same period in 2019. This shows that buyers have adjusted to the new economic reality in order afford to buy a home.
And while the number of sales has fallen in May, transactions are still happening, which indicates that sellers have likewise adapted to the new market conditions. Pricing their properties realistically, will give sellers a better chance to sell their home quicker.
The property market has shown itself very resilient, despite the economic situation. This makes it more likely that it will avoid a crash and instead achieve a soft landing.
