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Rate hikes have broken up the house price lot, but higher mortgage rates and cheaper homes wouldn’t be a bad outcome, says SIMON LAMBERT
There are a number of reasons why house prices have soared since the late 1990s, but the main one is cheap money.
Along the mostly upward path of the house price chart, there were a few elements that accelerated things: the boom in interest-only mortgages in the early 2000s, joint purchases becoming the norm, the rise of the Bank of mom and dad, crazy government schemes like Help to Buy etc.
But the main thing that has kept the show going is the low mortgage rates.
Fixed rates with reduced prices have pushed affordability further and further and real estate prices to move further away from wages.
Off the boil: The average home is down £15,500 from its August peak, says Nationwide
Perhaps one day we’ll look back on the pandemic boom as the moment of peak madness, a time when the UK casino property market took an almighty bow, fueled by an intoxicating cocktail of itchy lockdown feet, stamp duty holiday vibes and fixed rate mortgages below 1 percent.
How history handles the house price beano won’t be known for a while, but what’s abundantly clear at this point is that rising mortgage rates have really broken the lot.
Yesterday, Nationwide released its first home price report of 2023, showing that annual property inflation has fallen all the way back to 1.1 percent.
But the most striking thing about the report was not that headline figure, but the difference between the average house price peak of £273,751 in August and the level of £258,297 now.
These figures show that the average house price has fallen £15,454 since late summer.
That sharp drop is due to mortgage rates rising to levels not seen in years and seems completely predictable – although predicting anything to do with the UK housing market is a real mug.
Mortgage rates skyrocketed in the wake of Kwasi Kwarteng’s disastrous mini-budget, as poorly executed debt-funded tax cuts disrupted bond markets and sparked a mini-financial crisis, scaring banks and building societies.
The two-year average fixed rate peaked at 6.65 percent in October, while the five-year average fixed rate stood at 6.51 percent.
These were the kind of old-fashioned levels that many homeowners and mortgage market experts thought we wouldn’t see for years to come.
They put a serious dent in the finances of anyone unlucky enough to take out a new mortgage, many of whom had fixed interest rates of 2.5 percent or lower.
That much higher mortgage rate has also upended the financial calculations of those planning to move, who have discovered in recent months that they simply cannot borrow and pay as much money as before.
Mortgage rates have fallen since that peak – when strict schoolmaster Jeremy Hunt tore up naughty schoolboy Kwasi’s volatile homework – but they’re still well above where they were a year or so ago.
The best five-year fixes are now just above 4 percent and the average five-year fix is 5.23 percent, while not so long ago these levels hovered around 1.5 percent and 2.5 percent, respectively.
To put that in context, if you had £1,400 you could afford to pay off monthly, while the average five-year fix was 2.5 per cent, you could end up with a £310,000 mortgage over 25 years.
Now with the five-year average fixed rate of 5.23 per cent, that same monthly payment buys just £230,000 worth of mortgage.
In the absence of the ability to raise much more money for monthly payments or tens of thousands more for a down payment, something has to be given
This leaves £80,000 less than such a potential buyer can spend on a home.
As this situation plays out for genuine buyers, there must be something to offer in the absence of the ability to suddenly raise a lot more money for monthly payments or tens of thousands of pounds extra for a down payment.
And that something has to be house prices.
According to Nationwide’s report, median home prices are down 5.6 percent from late summer’s peak, but I suspect most sellers would have to accept a bigger discount now compared to then to get a subscription sold .
Today, the Bank of England is expected to raise rates again to 4 percent, with perhaps one or two more hikes in the coming months before reaching a peak of 4.5 percent.
Many think that the Bank may have to start cutting rates again after that, but there may not be a return to the ultra-low rates we’ve become accustomed to from the financial crisis until last year.
Mortgage rates could linger at what would still be historically low levels, but a relatively high level compared to recent years, around 4 to 5 percent. This will depress property prices.
This will no doubt cause some pain in the short term, but higher mortgage rates and lower house prices relative to wages would not necessarily be a bad outcome in the long run.