One of the most striking observations about the UK property market in August was the notable decline in both house prices and sales. According to a report by the Royal Institution of Chartered Surveyors (RICS), house sales and prices experienced a substantial drop during this period. This downturn can be attributed primarily to the impact of high mortgage rates, which has considerably dampened the demand for properties.
The RICS house price balance, which gauges the difference between the percentage of surveyors observing increases and decreases in home prices, plummeted to minus 68 in August, down from minus 55 in July. This reading represents the lowest point since 2009 and falls significantly below the minus 56 forecasted by economists in a Reuters poll.
Declining Housing Demand
The RICS report also highlighted a decline in new buyer inquiries, a critical metric for assessing housing demand. In August, new buyer inquiries dropped by two points compared to July, settling at minus 47. Simultaneously, new sale instructions witnessed a substantial nine-point slide to reach minus 26.
Furthermore, surveyors reported the weakest assessment of newly agreed sales since the onset of the Covid-19 pandemic when the property market effectively ground to a halt. These data points collectively indicate a sluggish housing market with limited prospects for immediate recovery.
The Role of Mortgage Rates
One of the key driving forces behind the current state of the UK property market is the sharp increase in mortgage rates over the past two years. This surge has been primarily caused by the Bank of England’s 14 consecutive interest rate hikes. These hikes have had a cascading effect, resulting in reduced house prices, fewer property transactions, and a decline in mortgage approvals.
Both two-year and five-year fixed mortgage rates have experienced fluctuations in recent months as financial markets assess the likelihood of further interest rate increases. However, they remain significantly higher than the levels seen in 2022. Market expectations indicate another 0.25 percentage point increase, which would raise rates to 5.5 percent, as the central bank aims to combat inflation.
Ongoing Impact and Expectations
The cumulative impact of the 14 interest rate increases since December 2021 has not yet been fully absorbed by the market. Consequently, estate agents’ expectations for the coming months remain bleak. The net balance of price expectations for the next three months dropped to minus 67 in August from minus 60 in July, indicating a sharp contraction. Similarly, the 12-month horizon remained largely unchanged at minus 48.
The Rental Market’s Resilience
Interestingly, while the property purchase market faces challenges, the rental market has displayed remarkable resilience. Rising mortgage payments have fueled increased demand for rental properties. Survey respondents reported a net reading of 47 for tenants’ demand and anticipate further increases in rental prices over the next three months.
However, it’s essential to note that new landlord instructions have continued to decline. Many landlords are leaving the sector due to the combination of higher interest rates and increased taxes. This limited supply and high demand have led to a concerning development – rental affordability has reached its worst level in a decade. According to research from property portal Zoopla, the average rent now consumes 28 percent of average gross earnings.
Navigating the New Era of High Mortgage Rates
In this challenging environment, prospective property buyers face a daunting task. Myron Jobson, an analyst at investment platform Interactive Investor, emphasizes that with mortgage rates likely to remain elevated in the near term, buyers will need to adapt to the new era of high mortgage rates. This may involve a meticulous examination of financial strategies to ensure the feasibility of property purchases.
In conclusion, the UK property market is experiencing a period of significant turbulence, driven by high mortgage rates, declining house prices, and reduced sales. However, the rental market remains resilient, posing both opportunities and challenges for investors. As the market continues to evolve, it’s crucial for individuals considering property investment to stay informed and adapt their strategies to navigate the changing landscape effectively.