Without a doubt, 2022 was a turbulent year for the UK housing market. House prices may have hit record levels, but the Bank of England created havoc. By December, the base rate had been increased nine times over the previous 12 months, depressing market activity and putting the brakes on property prices.
According to optimists, there will not be a price crash but a soft landing thanks to a 25% fall in mortgage rates over the course of this year. They argue that forbearance measures from big lenders will help struggling borrowers as they switch to interest-only or competitive fixed-rate deals without the need for affordability tests. Since nearly two million people will need to re-mortgage as their fixed-rate deals expire in 2023, this will cushion the blow and reduce the volume of distressed/repossession sales.
Inflationary pressures and a fiscal squeeze have made mortgages unaffordable for many people relative to their incomes. Average UK house prices are now eight-times average earnings, according to Schroders. In London, the ratio rises to 11 times. Nevertheless, the economic mood is gradually moving away from ubiquitous gloom. For example, as the leading indicator of where corporate earnings are headed, UK equity markets have been back on an upward trajectory since November 2022.
A notable shift in sentiment can also be seen in reduced rates for two-year and five-year fixed mortgages: after spiking at 6.5% last October, they have now fallen back towards the 4.5% mark. For potential buyers, interest rates matter because they affect both affordability and lenders’ willingness to lend.
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Several commercial retail lenders such as Santander, Barclays, Nationwide, and Halifax have recently announced mortgage rate reductions to an average of around 4.5%.
When big commercial lenders cut rates, the market becomes more attractive and more affordable for domestic buyers, particularly first-time buyers – and not just to overseas or domestic cash buyers as happened when rates recently spiked. Notwithstanding the media hype about banks planning to reduce their mortgage lending, they still have plenty of appetite to lend.
The market has now fully digested everything that happened during the past year, including the “new normal” level of interest rates. These increases are now priced into people’s thinking, enabling industry professionals to advise with renewed confidence about where rates might be heading.
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History shows that whenever the UK property market is reportedly down, it does not stay down for long. Good properties are not always available: in busier markets, people often lose out because of increased competition, so buyers with available funding should press ahead on properties they really want.
But there is a caveat: incomes will need to rise in real terms in order to increase domestic buyers’ purchasing power. Without that boost, the market may still be more attractive and affordable to overseas and cash buyers.
By Goli-Michelle Banan
Source: Today’s Conveyancer