UK house prices have experienced their sharpest annual fall since 2009, according to a report from Nationwide. The report reveals that in August, house prices declined by 0.8% compared to the previous month, resulting in an annual rate of house price growth of -5.3%, down from -3.5% in July. This decrease in prices does not come as a surprise, given the rise in borrowing costs in recent months, which has led to reduced activity in the housing market. Despite this, the chief economist of Nationwide, Robert Gardner, believes that a “relatively soft landing” is still possible if broader economic conditions align with forecasters’ expectations.
Increased Mortgage Rates
The decline in house prices can be attributed to the increase in borrowing costs, which has impacted the overall activity in the housing market. Mortgage approvals have been approximately 20% below the 2019 average in recent months, and recent mortgage application data suggests that this weakness has continued. However, Gardner remains optimistic that a soft landing is still achievable as long as economic conditions evolve in line with expectations.
One positive factor that could contribute to a recovery in the housing market is the expectation of low unemployment rates, which are predicted to remain below 5%. Additionally, the majority of existing borrowers should be able to handle higher borrowing costs, thanks to fixed-rate agreements and affordability testing measures. Gardner anticipates that healthy rates of nominal income growth, coupled with modestly lower house prices, will improve housing affordability over time, particularly if mortgage rates moderate following the peak of the Bank Rate.
Statistics reveal that the number of completed housing transactions in the first half of 2023 was nearly 20% lower than pre-pandemic levels in 2019 and around 40% lower than in the first half of 2021. This decline can be partly attributed to the boost in activity from pandemic-related changes in housing preferences, the stamp duty holiday, and low borrowing costs. Analysis of transaction composition shows that purchases made with cash have remained resilient. However, purchases involving a mortgage have slowed significantly.
Notably, the decline in mortgage activity is primarily attributed to affordability pressures resulting from the substantial rise in mortgage rates since the autumn of the previous year. Cash buyers have not been affected by these affordability pressures. For first-time buyers earning the average wage and purchasing a typical first-time buyer property with a 20% deposit, monthly mortgage payments now account for over 40% of their take-home pay when the mortgage rate is 6%. This is significantly higher than the long-run average of approximately 29%.
Gardner also highlights a shift in the types of properties being purchased by owner-occupiers using a mortgage. While transactions for all property types have decreased compared to pre-pandemic levels, the most significant decline has been observed in detached houses. Buyers are increasingly showing interest in smaller, more affordable properties, with flats experiencing a smaller decline. This shift may be attributed, in part, to the conclusion of the Help to Buy scheme, which assisted buyers with smaller deposits in purchasing newly built homes. Flats remain relatively more affordable, with average prices having increased by only 13% since the start of the pandemic, compared to a 23% increase for detached properties.
Conclusion
The UK housing market has experienced a decline in prices, with the sharpest annual fall since 2009. Economic factors such as increased borrowing costs and reduced mortgage activity have contributed to this decrease. However, there is hope for a relatively soft landing and recovery if broader economic conditions align with expectations. Low unemployment rates and affordable mortgage rates could improve housing affordability over time. The market has already shown signs of shifting towards smaller, more affordable properties, potentially due to the conclusion of the Help to Buy scheme and the relative affordability of flats compared to detached properties. Investors should consider these factors when assessing opportunities in the UK property market.