All things considered, Britain’s housing market has held up pretty well so far in the face of a relentless rise in borrowing costs that has seen five-year fixed rate mortgages climb above 6%. House prices, according to the Nationwide Building Society, are down just 3.5% on a year ago and rose slightly in June. The Bank of England reported a small rise in mortgage approvals in May.
The key words, though, are “so far”. Just because there has yet to be a housing crash despite 13 consecutive increases in interest rates from Threadneedle Street’s monetary policy committee doesn’t mean there won’t be one. There is still the chance of a soft landing but the risks of a hard landing are rising by the day.
The housing market’s resilience is explained by two factors. Firstly, Britain has a growing population – with net migration standing at just over 600,000 last year – and the supply of homes is struggling to keep up. The second is that most homebuyers have yet to feel the pain of the Bank of England’s squeeze because they are on fixed-rate mortgages.
As the Nationwide pointed out, 85% of mortgage payers are on fixed rates but about 400,000 will have to refinance each quarter in the years ahead. “This equates to around 20% of the fixed rate mortgage stock refinancing by the end of 2023 and c.40% by the end of 2024”, says Robert Gardner, the building society’s chief economist.
As things stand, these borrowers are going to see their monthly repayments rise sharply – by about £400 a month for someone seeking a new two-year deal when their existing fix expires. There are signs that many buyers are opting for variable-rate mortgages in the hope that the Bank of England will take its foot off the brake once inflation starts to come down.
This will eventually happen, but it may be some way off. The Bank has been shaken by the rise in core inflation – which strips out items such as food and energy – and is expected to announce a 14th successive rise in interest rates next month. The view in the City is that the monetary policy committee will opt for another half-point increase from 5% to 5.5% and rates will not peak until they reach 6.25%. If so, fixed-rate mortgages will climb above 7%. That could well be the tipping point at which the housing market cracks, and takes the economy down with it.
The warning signs are certainly clear. If interest rates stay anywhere close to their current levels, there will be a sharp drop in mortgage applications and prices will fall. Andrew Wishart, property analyst at Capital Economics, says that were mortgage rates to be sustained at their current level for several years, house prices would fall by 25%, but thinks it more likely that lower inflation will allow the Bank of England to start cutting rates from the middle of 2024. Even then, Wishart thinks house prices will fall by 12% from peak to trough, which is hardly conducive to a pre-election feelgood factor either for people buying their homes or for renters, who are often overlooked but who are also suffering severe financial pain.
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One gauge of mortgage affordability is the share of monthly income taken up by home loan payments for a first-time owner-occupier on the average wage buying a typical property with a 20% deposit. The long-run average is just under 30%, but it is now over 40% and rising. Only twice in the past 40 years – 1989 and 2007 – has it been higher. A housing crash followed on both occasions.
