The charts that show the property downturn is just beginning

Housing Market
Housing Market

For a brief period this spring, the housing market looked like it was out of the woods.

Bank of England data showed mortgage approvals climbed in February and March.

After seven consecutive months of decline, house prices rose by 0.4pc in April, according to Nationwide’s index. Rightmove recorded a 1.8pc jump in asking prices in May as sellers bet on a housing market recovery.

Some analysts and commentators began to predict that Britain’s property market may have skirted a much anticipated downturn and was on the up.

It was a false dawn.

Mortgage approvals slumped again in April, falling far below City expectations.

After a brief respite, Nationwide confirmed that house prices once again resumed falling in May.

And new data published on Tuesday showed that house building fell for the sixth month in a row in May, dropping to the lowest level recorded since spring 2020 when lockdown brought construction to a near standstill.

Excluding the pandemic period, home building last month was at its lowest level since April 2009 when the financial crisis was hammering the sector.

“A lot of people were then sort of saying oh it’s over,” says Neal Hudson, who runs BuiltPlace analysts.

“But I think the key thing for me, having experienced the last downturn, is just knowing that these things take an incredibly long time to work their way through the system.”

Based on mortgage rate rises to date, BuiltPlace’s modelling suggests that house prices should fall by 10pc to 15pc from their peak last Autumn.

Average prices have so far fallen by 4.3pc, according to Nationwide figures, suggesting the downturn is only just beginning.

BuiltPlace’s predictions may even prove too optimistic, as mortgage rates are in fact about to climb even higher.

Surprisingly high inflation data last month prompted analysts and investors to rip up their forecasts for the peak of interest rates, with the Bank of England now expected to take them as high as 5.5pc to crush price rises.

As a result, lenders have been rapidly raising the prices on their mortgage offerings.

A buyer taking out a £200,000 home loan will have to pay an extra £840 per year compared to if they had secured a deal just a fortnight ago, based on the average daily quoted rate for a two-year fixed rate mortgage from Moneyfacts.

Rates are not climbing quite as fast as they did in the aftermath of the autumn mini-Budget but they are on track to exceed the peak hit in October last year, warned Andrew Wishart, who runs the housing service at Capital Economics

Average mortgage rates across all deposit sizes are now expected to reach 5.76pc next April, surpassing the high of 5.6pc recorded in October 2022. For those fixing for two years, the typical rate could cross 6pc.

Rates are expected to climb not only because of the higher cost of wholesale borrowing wrought by Bank of England increases, but also because of a looming uptick in unemployment.

Higher interest rates will crank up financial pressure on companies, likely prompting more redundancies across the economy.

Wishart says: “We think that lenders will increase their interest margins to account for the hit to their profits from more mortgages entering arrears while their cost of funding is still high.”

Simon Rubinsohn, chief economist of the Royal Institution of Chartered Surveyors (Rics), a professional body, says: “Before the recent shift in sentiment on interest rates, one might have come to the conclusion that perhaps some of the projections had been a little bit too negative.

“But the idea that we have passed through this squall, clearly, as the last week or two has demonstrated, has been premature.”

Hudson still thinks that a 10pc to 15pc drop in house prices is realistic because the modelling does not incorporate behavioural changes.

The impact of higher rates could be partly offset by factors such as increased lending from the so-called Bank of Mum and Dad and a jump in buyers spreading out their repayments over longer loan terms. Already, demand for 35-year mortgages among first time buyers is at a record high.

Ironically, a shallower fall in house prices could in fact be worse for homeowners.

Hudson says: “We have higher interest rates and the market needs to adjust to them. The longer it doesn’t, the more damage that creates in terms of lower turnover, less housing delivery and general market stagnation.”

Even when interest rates eventually begin to fall, a return to the rock bottom levels seen during the decade before the pandemic is highly unlikely. The property market will have to get used to rates that settle at a much higher level.

Rubinsohn says: “We were living in a period that was particularly unusual. Even if interest rates do come back, they’re not going to come back down to where they were and they will probably settle closer to 3pc or 3.5pc.”

New house building is closely tied to transaction levels across the wider housing market. If turnover slumps, builders scale back because they are not sure that they will be able to sell.

“The challenge is, if there is no adjustment in prices, then turnover will be low, and we will end up with fewer homes getting built by house builders. It slows down the whole system,” says Hudson.

The new build sector is already bearing the brunt of the downturn, says David Hickman, a surveyor in the South West.

“A lot of people are shunning new developments because they know that they are paying over the odds to the developer,” says Hickman. New homes are typically sold at a premium that is lost on resale.

During the financial crisis, house prices fell for 17 months in a row before beginning to recover.

However, house building was in reverse for far longer. New housing starts slumped in 2008 and did not come close to pre-crash levels until 2014, six years later.

Today’s housebuilding slump will likely be shorter because this downturn has not been precipitated by the same kind of financial market bubble bursting, says Hudson. But the drop in completions will still outlast falling prices, he says.

Whichever way it is measured, the downturn seems to be just beginning – not drawing to a close as many hoped just weeks ago.

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