Why UK house prices may drop 20% after recent interest rate hike | housing market

Estate agents in Britain usually radiate optimism but will be watching anxiously next Thursday afternoon when… Bank of England It is expected to announce the latest blow to the rapidly weakening real estate market.

Crisis time has come for a sector that for years seemed to defy gravity. The Threadneedle Street Monetary Policy Committee (MPC) is preparing to raise official borrowing costs for its 10th consecutive meeting, with mortgage approvals already down 30% from pre-pandemic levels and house prices down 4.3% from their August peak, according to the Bank of Halifax.

Further declines are inevitable as borrowers adjust to an era of ever-high interest rates. The city is preparing for a half percentage point hike, to 4%, and for the rate to stay high at least until the Bank is sure inflation is on track to meet its 2% target.

Analysts agreed that 2023 would see more declines in house prices, with one predicting a peak-to-bottom decline of more than 25% once inflation is factored in.

There are structural reasons behind soaring UK house prices – strict planning laws, a tax system that rewards home ownership, a sharp decline in the number of new homes being built since the 1950s and 1960s – but sometimes there are breaks. direction.

This year is on its way to being one of those breaks. A long boom driven by record low interest rates has come to an end.

The party was always going to end sooner or later, even with extremely low interest rates, finding a deposit for a house and meeting mortgage payments became more and more difficult. Figures from Halifax this week showed a first time buyer was paying just over £300,000 to get a foot on the property ladder and needed a £62,000 deposit. More than 60% of mortgage completions were in joint names last year.

But two other factors have contributed to the rapid slowdown in demand: the steady increase in official interest rates since late 2021 and the impact of Liz Truss’ brief presidency, which has included mortgage rates soaring to nearly 6%.

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Andrew Wishart, real estate economist at Capital economicsHe said average quoted mortgage rates jumped from 1.4% at the end of 2021 to a peak of 5.7% in November last year. While the effects of Kwasi Kwarteng’s budget have eroded slightly, mortgage rates were still likely just above 4.5% by the end of the year.

“While the current level of house prices was affordable when interest rates were 2%, that is not the case with mortgage rates at 5%, 4% or even 3%,” Wishart said. “Higher mortgage rates mean that buyers will be less able and willing to borrow, stretching their budgets and putting downward pressure on home prices. Getting affordability back to a sustainable level by the end of the year means a drop in the price-to-earnings ratio from nearly eight Multiply income now to less than six, corresponding to a price drop of about 20%.”

George Buckley, a British economist at Nomura, said house prices will need to fall because higher interest rates have made servicing home loans more expensive. The extent of the fall will depend on how quickly this adjustment occurs. According to Nomura, getting the mortgage payment-to-income ratio back to its long-term average by the end of this year would require a 20% drop in rates. If the adjustment happens more slowly between now and the end of 2027, the decline will be just under 10%. Nomura Central expects prices to drop by 15% by mid-2024.

Callum Pickering, chief UK economist at Berenberg, said the size of the correction in house prices is important because the broader UK economy has been sensitive to large fluctuations – either up or down. Based on the latest RICS publication, he said the imminent deflation is likely to be on par with the early 1990s, when interest rates peaked at 15%, and the global financial crisis, when the UK banking system teetered on brink of collapse.

“In contrast to the recent string of surprisingly positive data for the economy as a whole, the December RICS Housing Market Survey makes for a bleak read,” Pickering said.

The balance of prime house prices — the gap between RICS members who say prices were rising versus those who said they are falling — came in at -42.0% in December, compared with -25.7% in November, the lowest monthly balance since October 2010 and the third-largest annual decline dating back to 1978.

“The largest annual decline occurred in the late 1980s, before the housing market crash and recession in the early 1990s, while the second-largest decline occurred during the global financial crisis in 2008. Although the decline in the housing market was widely predicted by economists (including us), Pickering said the month-to-month decline in the December survey far exceeds our expectations and consensus.

In the early 1990s, doubling unemployment prolonged and deepened the collapse of house prices, as people who lost their jobs were forced to sell their homes in a bear market. While the currently low level of unemployment makes a repeat of record repossessions unlikely, Wishart says there will still be a significant price drop.

“Overall, even in the absence of forced sales, we believe higher mortgage rates will lead to severe re-pricing in the housing market this year. The 12% nominal peak-to-bottom home price decline we expect is shy of the roughly 20% declines that we see We saw it in 2007-09 and 1989-92, and it only returns house prices to their level in March 2021. But note that in real terms, that’s a 27% drop, on par with those episodes.”