HOW THE MINI BUDGET TRIGGERED CHAOS IN THE PROPERTY MARKET

Monday October 3, 2022

Homeowners on the cusp of selling their property were initially buoyed by the news of the stamp duty cut revealed in Kwasi Kwarteng’s mini-Budget.

Many were convinced they could bank a windfall from the tax giveaway and rushed to renegotiate deals with their prospective buyers.

But within days sellers were themselves under pressure as the balance of power in negotiations slammed into the opposite direction.

First-time buyers at the end of property chains were suddenly reading that house prices could fall by up to 15% next year, after a surge in government bond yields left those looking to remortgage facing potentially ruinous repayments rates.

Henry Pryor, a London estate agent, said a first-time buyer at the bottom of a five-property chain he was involved with asked for a 10% price cut.

“It was a slightly mad week, I suspect we will remember it for a while,” he says. “It was ironic that on the Friday of the Budget, sellers were going back to buyers saying: you’re better off as a result of this and I’d like some of it.

“But then in less than a week we saw that change completely and we’ve now got buyers coming back saying prices will fall and they’d like to renegotiate.”

The upheaval in the property market was caused by the very same mini-Budget that had given many sellers cheer when the Chancellor first delivered it.

The market reaction to the fiscal statement – the most radical in decades – sent the financial plumbing of the property market haywire, forcing banks to withdraw deals at an alarming rate and gumming up activity.

Mortgage lenders were responding to dramatic changes in government bond prices, which are used to price loans. The price of gilts fell sharply in the wake of Kwarteng’s tax cutting Budget as investors realised that more government borrowing would be required.

Andrew Wishart, senior economist at Capital Economics, says: “The increase in interest rates that markets have been expecting over the past few days is going to pass through very quickly to mortgage rates as we’ve seen with lenders withdrawing their products.

“Mortgage rates rising to about 6% is pretty unavoidable now and that would take the cost of a mortgage on a new home purchase to its highest as a share of income since 2007.”

The price moves dramatically reduced the amount borrowers could afford to pay for their dream home.

The upheaval left many stunned and unable to make decisions. One prospective seller who was looking to offload a flat in Harrogate for around £550,000 says he won’t be able to move forward until markets calm down.

He says: “We’re being told the market has dropped in value and we need to reduce our price.

“The agent has said the number of purchasers has reduced dramatically and there’s a lack of confidence due to the uncertainty, the fall in sterling and rising interest rates.

“We haven’t put a figure on it yet, and we are having to reassess the price and whether we are willing to sell it.”

Mr Wishart says: “Even before this, it was clear from the survey data that the rises already taking place in the market were causing buyer demand to drop quite dramatically. Enquiries had already dropped to their lowest level since 2008 if you exclude the pandemic.

“The further rises in interest rates will intensify that, and the subsequent falls in house prices we will see are going to reverse most of the pandemic boom as the impact of the mortgage rates come through.”

Wishart expects the average house price will fall to £244,500 by August next year if prices fall by 15%.

The fall will be triggered by banks increasing rates as they come back to market and offer less money to prospective homeowners.

“With interest rate rises, we could start to see some re-negotiations if mortgage offers expire during the conveyancing process,” said Nathan Emerson, chief executive of Propertymark, a trade lobby for UK estate agents.

“A trend of re-negotiation would start to soften house prices as those final sale prices are used by agents to create comparable evidence for the valuing new properties entering the market.”

Banks started withdrawing deals en masse on Monday as the pound fell to a record low and investors dumped UK government debt. The benchmark 10-year gilt yield jumped by as much as 0.35 percentage points to a 12-year high of near 4.2% and the two-year yield soard by 0.5 percentage points to 4.4%.

Halifax, which is owned by Lloyds Banking Group, was the first to restrict lending in a pullback that would ultimately engulf more than half of the nation’s mortgage market.HSBC, Santander and Nationwide soon followed suit by pulling new mortgage deals and increasing prices.

Britain’s banks had pulled a record 1,000 home loans from the market on Tuesday, more than double the 462 products removed during the pandemic in April 2020, according to Moneyfacts. By Thursday, 1,621 deals had disappeared from the market in the days since the mini-Budget.

Virgin Money pulled its entire product range on Monday and came back into the market on Thursday with rates of between 5.24% and 5.5%. Many other lenders have adjusted their prices without removing products.

Capital Economics now expects mortgage rates to average 6% by January next year, up from around 3.6% in August.

If mortgage rates go up by that amount, the average household refinancing a two-year deal would see monthly repayments jump over 70% from £863 to £1,490.

These new rates will all affect the borrowers on the 600,000 fixed-rate deals due to expire in the second half of this year, and 1.8 million deals ending next year.

Ray Boulger of mortgage brokers John Charcol says: “When we saw gilt yields go up by 50 basis points on Friday it was clear we were going to see lenders push rates up.

“I was actually surprised that most of them didn’t make that announcement until Monday or Tuesday. The writing was clearly on the wall on Friday, and there was another similar move on Monday that just made things look even worse.”

Borrowers coming off fixed rate deals rushed to re-mortgage before a rapid upswing in prices. The banks were overwhelmed with phone calls as borrowers sat on hold to secure a new deal. Disgruntled policyholders took to social media to vent their frustrations over call wait times, which in some cases appear to have stretched for between 2-3 hours. Some people have spent several days trying to get through to a mortgage advisor.

Barclays reached its daily booking limit by 10am on Wednesday and Santander was forced to draft in new customer service personnel to deal with the deluge in inquiries. The Spanish bank started redeploying colleagues from other parts of the bank to handle the surge in calls and its operators have been calling back customers in the evening to get through the backlog of queries.

‘It’s not something we’ve had to think about for 13 years’

Helen McIntyre, a marketing manager from Daventry, Northamptonshire, spent 3 hours and 15 minutes on Wednesday in a queue to speak with Santander. She has been on a variable rate mortgage since 2009, but now wants to switch to a five-year fixed rate product.

McIntyre says: “It’s not something we’ve had to think about for 13 years. But in the last week it’s massively accelerated from something that was practically running on autopilot, to something that’s consuming all our attention.”

When she finally got through to a mortgage advisor, McIntyre was told she could stay on her 20-year lifetime tracker mortgage or move to a fixed-term mortgage.

She says: “The best fixed rate they could offer for 4.14% over five years, and there was a £999 fee to arrange it.

“At the moment, we’re paying 2.75%, and before that it was 0.75%. So it’s already gone up by 2% from earlier this year. For us, it’s trying to weigh up whether switching to a fixed-rate mortgage is worth it — particularly if interest rates do eventually go up to 6%.”

The danger of staying on her current mortgage is that her family may end up feeling the brunt of higher interest rates, when they could have locked in a lower rate earlier.

Pryor says it is reasonable for buyers to look for a discount given the current conditions.

He says: “I don’t begrudge them for a moment, it’s a nervous time, particularly if you are taking that first step onto the property ladder. You want to feel confident that you are doing the right thing.”

Pryor’s five property chain deal that faced uncertainty last week ultimately went through, as all the participants in the chain were able to spread the cost of the price cut. But there is no guarantee that other transactions will enjoy the same fate.

“We are all acutely aware that these are uncertain times and we are all wondering where the market will be in six months,” he says.

“It’s not an easy thing to predict and if I knew the answer to that I probably wouldn’t be here speaking to you. I’d be on a yacht in the Mediterranean laughing into a Martini.