THE HOUSING MARKET IS AT ITS PEAK – BUT HERE’S WHY YOU SHOULD BUY NOW
Monday May 9, 2022
For a would-be buyer, the property market is intimidating. House prices are at record highs after two years of frenzied demand and competitive bidding. But there are clear signs that the market has peaked.
Rising interest rates are pushing up mortgage costs, just as inflation is eating away at savings, households are battling the biggest drop in real incomes on record and energy prices are forecast to jump again in October. Analysts are forecasting house price falls next year.
So is this the worst time to buy a house – and should bargain hunters wait for prices to fall?
Buying at the market peak
The pace of house price growth slowed from 14.3% in February to 12.1% in March, according to the Nationwide building society. The Bank of England’s decision to raise the Bank Rate to 1% this week is expected to cool demand further.
Simon Rubinsohn of the Royal Institution of Chartered Surveyors, a professional body, said: “Is it realistic to continue to see double-digit house price growth? Almost certainly not. The real question is how far the market slows, and whether it tips into decline. We could see modest falls.”
The outlook is gloomy. Capital Economics, a consultancy, has forecast “real” household disposable incomes, which has an effect on consumer confidence, will plunge by 3.3% in 2023.
Just as soaring inflation is eroding savings, rising interest rates are making mortgage rates more expensive. Capital Economics expects mortgage rates to rise from 1.8% in March to 3.6% in 2023.
Rates would still be fairly low historically, but the jump would be a major shock to the market and homeowners’ expectations. The year-on-year percentage point change in mortgage rates would be the largest on record in Capital Economics’ dataset, which goes back to 1993. The firm expects house prices to fall by 3% in 2023.
But prices could stay high
Forecasts of falls are not the consensus among analysts.
Lucian Cook of Savills estate agents said instead that price growth would slow. “The four successive rate rises and the rising cost of living are likely to bring more caution over coming months, which will mean that the rate of house price growth slows progressively, potentially to low single digit figures in the coming years.”
The strength of the employment market and the ongoing mismatch between supply and demand within the property market would underpin home values, Mr Cook added.
House price falls won’t help
Even if the housing market does drop, and prices fall, it would not necessarily help first-time buyers because they would be worst hit by the negative economic climate.
Mr Rubinsohn said: “Historically, the number of major, consistent house price falls are few and far between and they are normally associated with a big economic downturn.
“But there are no guarantees that that scenario plays into the hands of first-time buyers. In downturns, people can find that their jobs are at risk, or that their wages don’t increase.” Younger buyers are often the group hit hardest by recessions.
Rising mortgage costs also mean it will still be more expensive to buy even if homes are cheaper. Analysis by Hamptons estate agents shows that a first-time buyer purchasing a typical £229,000 home with a 10% deposit saw monthly mortgage payments jump from £877 to £902 when the Bank Rate was last raised to 0.75%.
Thursday’s increase will push costs up to £928. This means that a first-time buyer purchasing now will pay an extra £612 per year than if they had bought at the beginning of March.
The rises in mortgage payments will be so large, a first-time buyer will still pay more even if house prices fall.
A rise in the Bank Rate to 2% would push monthly payments to £983 even if property values dropped 5%. This means a buyer would pay an extra £1,272 per year compared to if they had purchased in March.
Andrew Montlake of mortgage broker Coreco said: “Unfortunately the buyer group that will be most affected by rising rates will be first-time buyers.
“That is the stage where a buyer has a smaller deposit and needs the most borrowing power. They might find buying becomes out of reach.”
Calculate against your rent
High levels of tenant demand are pushing up rents to astronomical levels, giving tenants even more impetus to buy.
The average rent on a property outside London in February was £920, according to Hamptons estate agents. A first-time buyer household could therefore expect to pay around £22,080 in rent across 2023 and 2024, not taking into account any rises.
Even with potential house price falls, the maths of buying still stack up for many. If they had instead purchased a £229,000 home (the average first-time buyer price, according to Hamptons), which then fell in value by 3% in 2023 and by 1.8% in 2024, as per Capital Economics’ forecasts, the property would be worth £10,868 less than they paid for it.
This loss would be roughly half what they would have spent in rent over the same period. If they had purchased with a 10% deposit, they would also still be free from negative equity.
“If you believe you are better off owning rather than renting, then don’t bother to wait for the big mooted price decline that may never happen,” said Mr Rubinsohn.
Deciding to buy a property makes even more financial sense if it is a long-term decision, as buyers can ride out any house price falls. Buyers who plan to stay in a property for around 10 years, can generally rely on getting their money back, said Mr Montlake.
Inflation will eat savings
Inflation, which Capital Economics forecast will be 8.7% in 2022, is a major deterrent to keeping savings in the bank. In real terms, the value of a deposit worth £22,900 at the start of 2022 (enough for a 10% deposit on a typical first home), will deteriorate to £21,149 by the end of the year – a loss of £1,751. Meanwhile, volatile markets make short-term investing tricky. For many, waiting for potential house price falls will not be worthwhile.
