5 September 2023 – We are seeing increased borrowing costs taking their toll on the housing market as property prices dropped by 5.3% in August. Property prices haven’t fallen at this rate since 2009.
For a few months now, house prices have been falling steadily, albeit slowly month on month. Bigger drops have been seen in the annual house price growth, which shows how prices stand compared to the same month in the previous year.
Increasing borrowing costs have been the main driver for the slowdown of the housing market. With average mortgage rates exceeding 6% for fixed-rate mortgage deals.
But there is no indication of an imminent crash in the housing market, even though property prices dropped by 5.3% in August. The fastest fall since 2009.
Property Prices Dropped by 0.8% in August Compared To July
Nationwide‘s latest House Price Index shows that the market continues to slow down. In August house prices fell marginally by 0.8% compared to the previous month.
However, year-on-year property prices fell at the fastest rate since 2009, with a drop of 5.3% in August, compared with 3.8% in July. The average house price in the UK now stands at £259.153, according to the building society.
Completions have also fallen by 20% in the first half of the year, compared to the same period in 2019, before the pandemic boosted activity in the housing market.
The softening is not surprising, given the extent of the rise in borrowing costs in recent months, which has resulted in activity in the housing market running well below pre-pandemic levels.
Robert Gardner, Chief Economist at Nationwide
A clear sign that high borrowing costs are responsible for the slowdown can be seen when looking at the composition of the transactions. Cash purchases have remained relatively stable, and have been up by 2% in the first half of 2023 compared to pre-pandemic levels.
In comparison, transactions with a mortgage have fallen significantly. There were 33% fewer home mover completions with a mortgage during the first six months of the year compared to the same period in 2019.
The number of first-time buyer transactions with a mortgage have fallen by around 25% in the first half of this year. Buy-to-let purchases with a mortgage have also dropped sharply, by nearly 30%.
And this trend is likely to continue, with mortgage approvals down by 20% in the recent months compared to 2019 levels, according to Nationwide.
At the moment affordability just proves too much for many would-be home buyers. Nationwide calculated that a first-time buyer, who is after a typical first-time buyer property and a deposit of 20%, would need to spend 40% of their take-home income on monthly mortgage payments.
These calculations have been made assuming a mortgage rate of 6%. This is well above the long run average, when first-time buyers spend around 29% of their income on monthly mortgage payments.
Housing Market Unlikely To Crash
Despite falling prices, lower levels of transactions and mortgage approvals, a crash of the housing market is not anticipated by industry experts.
Unless the economic situation doesn’t worsen considerably, the market is expected to make a relatively soft landing.
Unemployment is expected to remain low [below 5%] and the vast majority of existing borrowers should be able to weather the impact of higher borrowing costs, given the high proportion on fixed rates, and where affordability testing should ensure that those needing to refinance can afford the higher payments.
Robert Gardener, Chief Economist at Nationwide
So for now the housing market is anticipated to continue on the slowdown. However, independent financial advisory, asset management and fintech organisation deVere Goup predicts that house sales will start to rebound at the start of 2024.
DeVere expects the Bank of England to further raise interest rates next month, when they will peak at 5.5%. This is likely to further weaken demand.
However, deVere believes that the Bank of England will then start to slow down the interest rates increments, in order to lessen the impact on the economy and avoid a prolonged recession.
If this happens, deVere believes property sales will rebound in the first quarter of 2024.
It is also likely that property prices will continue to fall this year, improving affordability for buyers, while sellers won’t be too pleased about this. However, any seller serious about selling should stay realistic when it comes to house prices.
Because property prices dropped significantly in August, buyers are likely to offer below the asking price, especially if the house has been put on the market a few months ago.
As a result, accepting a lower offer could mean the difference between moving and staying put. Many sellers are also buyers, so while their home might not fetch as much as initially thought, the onward purchase is also likely to cost less.
By keeping this in mind and staying realistic, sellers should be able to sell their home despite the slowdown of the market.
