12 September 2023 – The last few months have seen property prices fall steadily, indicating that the property sales market is continuing to cool down. On the other hand, the rental market is hotting up with rents continuing to rise.
New data by Halifax has shown that house prices have fallen by 4.6% in August, compared to the same period in 2022. This means the value of a typical home in the UK has dropped by around £14,000 over the past 12 months.
The average house price now stands at £279,569, which is at the lowest level since early 2022 and various industry experts predict that prices are likely to continue to fall into next year.
As the sales market cools down, the rental market is hotting up. Rents have been rising to record levels and continue to do so. According to the latest figures from the Office for National Statistics, rents in the private rental sector have risen by 5.3% in July 2023.
In August, the average rent price in the UK stood at £1,261 per calendar month and the predictions by industry insiders show that the situation is likely to get worse for renters.
High Mortgage Rates Responsible
The fastest fall in house prices since 2009 has been driven by rising mortgage rates. Stubbornly high inflation prompted the Bank of England (BoE) to raise interest rates for 14 consecutive months.
The base rate currently stands at 5.25%, with average mortgage rates hovering around or above 6%. The sharp rise in borrowing costs has made buying a home a challenging task.
After house prices rose drastically during the pandemic, many first-time buyers got priced out. But with rising mortgage rates, more people found they could no longer afford to buy a property.
As a result, many would-be first-time buyers decided to wait for rates to fall again and stay in rented accommodation. With demand weakening, house prices started to fall, causing the property market to cool down.
But this delaying of buying a home has also had an impact on the rental market. Renters who would have bought their own home under more favourable circumstances stayed in their rental accommodation, increasing the pressure on already low supply levels.
With more competition, rents are rising. However, high mortgage rates impact on the private rental sector in another way too.
According to estate agents Hamptons, 68% of private landlords finance their buy-to-lets via a mortgage or other forms of finance. This means they will be directly impacted by mortgage rate increases.
As costs rise for landlords, they have to raise rents in order to stay afloat.
Rents Forecast To Rise By 25% By 2026
Hamptons predicts that the supply issues in the rental market combined with rising costs for landlords will lead to rents continuing to rise. In the final quarter of 2023, the estate agents think, rents will rise by 8%.
In Q4 of 2024, rent prices are forecast to increase by 7%, while the fourth quarter of 2025 and 2026 will each see rent rises of 5%.
This would mean that rents will rise by 25% between now and 2026, which would mean rental prices would end up being £1,550 per month higher in 2026 than in December 2022.
Hamptons’ predictions for the property sales market are more positive. The estate agents think house prices will fall by 2.5% in the UK by the end of this year, which would be an annual drop of 7.4% in real terms with inflation taken into account.
But they expect the prices to stop falling next year, as mortgage rates continue to fall and incomes start to grow in real terms.
For 2024, Hamptons forecast a 0% growth rate for house prices, but expect property prices to pick up again in 2025. At the end of this year, house prices are anticipated to grow by 3% and in 2026 by 5%.
So rather than crashing, the housing market is on the way to readjust and will recover over the next couple of years.
Despite rising rates and the cost-of-living crunch catching many households off guard, it’s becoming increasingly clear that the house price crash that some forecasters envisioned hasn’t materialised. Rather, we expect a minor price fall in 2023 followed by a slower recovery over subsequent years as households adjust to an era of higher rates.
Aneisha Beveridge, Head of Research at Hamptons
Together with a fall in house prices, Hamptons predicts a 19% decline in transactions in 2023. These are then expected to improve slightly in 2024 and recover to pre-pandemic levels in 2025.
The fortunes of the property sales and rental market are both linked to mortgage rates in one way or another. But while buyers and sellers can expect the sales market to recover soon, renters and landlords will continue to feel the pain for a bit longer.
