OPTIMISM IN THE UK HOUSING MARKET AS PRICES REBOUND DESPITE ECONOMIC HEADWINDS
Tuesday November 7, 2023
UK house prices displayed resilience last month, breaking a streak of six consecutive monthly declines. Sellers’ cautious approach led to a scarcity of homes on the market, resulting in an upswing in the average property price to £281,974 in October. This represented a 1.1% increase from September, equating to nearly £3,000. It marked the first time prices have risen since March, as reported by the mortgage lender Halifax. In comparison to October the previous year, prices dipped by a more moderate 3.2%, a smaller decline than the 4.5% annual drop witnessed in September.
The increase in prices can be attributed to sellers exercising caution, creating a temporary shortage of homes for sale. This shift in supply dynamics has driven the short-term upturn in prices, as buyer demand remains relatively weak overall.
South-east England experienced the largest annual decline in house prices, down by 6%, while London still boasted the highest average house price in the UK, at £524,057, despite a 4.6% decrease over the past year. In Scotland, prices slightly dipped by 0.2% annually, with an average of £202,608.
Last week, the Bank of England maintained interest rates at 5.25% for the second consecutive meeting, reaching their highest level since the 2008 financial crisis. The central bank issued a caution that the economy could teeter on the brink of recession in the coming year, signaling that interest rates are likely to remain elevated for an extended period to address persistent inflationary pressures.
The anticipated end of rate hikes by the Bank of England has led to a modest reduction in mortgage costs. The average two-year fixed residential mortgage rate dropped to 6.26% from 6.29%, while the average five-year fixed rate decreased to 5.84% from 5.87%, according to Moneyfacts.
Halifax anticipates a continued decline in house prices overall but foresees a return to growth starting in 2025.
The first-time buyer market has displayed resilience, as individuals seek to escape soaring rents. Prices for first-time buyers fell by a more modest 2.4% year on year, a smaller decrease than the 3.2% overall market decline over the past year.
Housebuilders have responded to the slowing demand by constructing fewer homes, which has provided support to prices. Persimmon, for instance, reduced its home construction by 37% between July 1 and November 6. Despite the slight deviation from the earlier estimates in August, the builder aims for a total of 9,500 homes this year, which is significantly lower than the nearly 15,000 constructed the previous year. Although the builder reported an improved sales rate in the past five weeks, it cautioned that “market conditions will remain highly uncertain” into 2024.
The average UK house price in October reached £259,423.
Despite the month-on-month rise in house prices, the housing market’s activity has remained subdued. In September, only 43,300 mortgages were approved for house purchases, which is approximately 30% below the monthly average in 2019.
The increase in house prices in October is likely a reflection of limited property supply. There is little evidence of forced selling, which would exert downward pressure on prices. Labor market conditions are solid, and mortgage arrears are at historically low levels. Therefore, it is expected that both activity and house prices will remain subdued in the coming quarters.
With the Bank of England’s base rate not expected to significantly decline in the foreseeable future, borrowing costs are unlikely to return to the historically low levels seen after the pandemic. Instead, a combination of solid income growth, along with moderately lower house prices and mortgage rates, is expected to gradually enhance affordability over time. Housing market activity is likely to remain subdued in the interim.
High mortgage rates and inflation may be impacting buyer demand, but the robust employment landscape and a shortage of properties for sale in high-demand areas are contributing to the maintenance of strong prices.
First-time buyers have become a significant market segment in some parts of London, alongside cash buyers who are unaffected by mortgage costs.
The property market has exhibited resilience, despite the prevailing challenges. While there may not be an immediate rebound, higher activity levels in October indicate positive momentum. The base rate is not expected to significantly decline in the near term due to inflation. However, as mortgage rates decrease, more borrowers are exploring new deals, particularly first-time buyers.
The Bank of England recently decided to freeze the interest rate, which has instilled a renewed sense of confidence among buyers. This collective outlook reflects a more positive perspective on the UK housing market’s future.