International Finance
Featured Real Estate

IF Insights: When will the United Kingdom’s ‘Housing Mess’ end?

IFM_United Kingdom Housing
The Resolution Foundation warned in June about the rate hike cycles piling more misery on the troubled housing sector

United Kingdom’s economy expanded slightly over the second quarter (0.2% in April-June 2023) thanks to strong output in June 2023 and despite inflation remaining high at 6.8%.

One should expect the Bank of England to be stern with its monetary policy decisions.

Meanwhile, Britain’s property market is showing signs of a slowdown, after a jump in mortgage costs reduced both buyer demand and sales volumes.

The Royal Institution of Chartered Surveyors said its measure of sales agreed fell to -44% in July 2023, the weakest since the start of the COVID pandemic and down from -36% in June.

The European country’s housing sector has been at the eye of the storm called the ‘mortgage crisis’ since 2022 end. So what’s the ground situation right now?

Is the crisis over?

Bank of England Governor Andrew Bailey remarked, “The evidence on the housing market is, yes, there is an adjustment, of course – I don’t think we should be surprised at that. But I would certainly not wish to talk this up into a crisis in the housing market, because I think there’s plenty of evidence that suggests that this is a process that has some moderating influences in it as well.”

As per Halifax’s observations, the average house price has fallen by 0.3% in July 2023, amid the lending companies providing mortgage rate cuts. A typical British home is now costing £285,044, compared with the August 2022 peak of £293,992.

Experts believe that the Brits will be cautious in the coming days, knowing that despite the drop in energy bills and strong wage growth freeing up cash to cater to housing costs, the purchase price of an average home will still see around 28% of the buyers’ real income going towards mortgage repayments, much higher than the 20% in the 2010s.

Buyers prefer small homes

Kim Kinnaird, director at Halifax Mortgages, also said that first-time home buyers were searching for smaller properties, to offset higher borrowing costs. So these borrowers are facing an “affordability squeeze”.

Bank of England too has connected the downfall of UK house prices with the ‘consumer affordability’ factor. MT Finance observes, “Buyers are continuing to either play the waiting game or become more aggressive when offering on properties. But there are positive signs – there is still the desire to buy, but with a realignment with what is realistic or achievable in value.”

LSL Property Services said its full-year profits were likely to be “substantially lower” than previous forecasts because of changes in the home loans market driven by increases to interest rates.

Savills estimates further show that 25,000 homes were sold by landlords between April-May 2023, compared with 22,000 in the previous two months.

This selling-off has accelerated post-COVID, with the landlords feeling the pinch of rising costs and interest rates, which have made new buy-to-let mortgages more expensive to repay.

As per the UK Financial Conduct Authority (FCA), a huge number of homeowners having interest-only mortgages will be unable to pay back their loans when their deal ends. There are now 750,000 interest-only and 245,000 part interest-only mortgages in the UK, according to the FCA stats. In total, 12% of homeowners now have these deals. And decoding the tally further, it was found that nearly half of the one million people having interest-only mortgages will not have enough money to repay their lender.

Some 22% even told the FCA they did not know they had to repay their mortgage when their term ended.

Any more BOE rate hikes will directly result in the mortgage rates getting dearer and renters seeing their payments increasing as buy-to-let landlords pass on higher mortgage repayments to the former.

The Resolution Foundation warned in June about the rate hike cycles piling more misery on the troubled housing sector. The think-tank further predicted that going by the current market pricing, households remortgaging in 2024 will see an annual bill rise of approximately 3,000 pounds (USD 3,813) or more on average.

The crisis gets horrible further

Since April 2020, UK rents have increased by almost 10%. In the pursuit of cheaper accommodations, people are ending up at poor-quality houses, with data suggesting about 600,000 privately rented homes across the country posing serious hazards.

Sometimes, people are not finding affordable accommodations too, thereby contributing to rising homelessness. Till July, over 100,000 British families, including more than 125,000 children, were reportedly living in temporary accommodation, the highest figure in 20 years.

Understand the game here.

Rising house prices have been a driver of the United Kingdom’s economic growth since the 2008 financial crisis. While the total mortgage lending reached 316 billion pounds (USD 402 billion) in 2021, the highest since 2007, the Brits are known for spending a lion’s share of their income on their housing. However, since late 2022, as per Bloomberg, the average UK house has been costing around nine times than the Brits’ average earnings.

Mortgage rates were more affordable when the BOE’s benchmark lending rate was near zero. As of 2023, with every round of monetary policy tightening, the loan payment bills are eating into the families’ incomes.

The Institute for Fiscal Studies estimates that higher interest rates will cause the average mortgage holder to suffer an 8.3% fall in disposable income compared to a scenario where rates remained at March 2022 levels.

For 1.4 million of these mortgage borrowers, disposable income will fall by over 20%. So the whole thing will lead to an ‘affordability crisis’, which will dent consumer confidence in the property market, thereby leading to a sharp fall in property prices.

However, economists are not expecting the United Kingdom to face a negative equity crisis, a situation where house prices crash and millions of people find their properties worth less than their mortgages.

The concluding words

In an agreement reached between Britain’s biggest lenders and the Rishi Sunak government, struggling mortgage holders will get a 12-month grace period before their repossession proceedings begin, a news that an average Brit household may find a comforting one.

However, inflation is still well above 6%, a situation which may encourage the Bank of England further to tighten its monetary policy, thereby forcing the housing sector to go into a pronounced slowdown, with high mortgage rates driving potential homebuyers away, thus forcing the industry to slash sales targets and profit forecasts further.

The housing sector has been severely sandwiched with the ‘consumer affordability crisis’ and the resultant ‘market bloodbath’. That remains the harsh reality.

What's New

IF Insights: EU talks tough at China on trade front, but at what cost?

IFM Correspondent

Off-plan homes in Dubai hit all-time highs in May 2024, cites report

IFM Correspondent

Start-up of the Week: Bloqhouse & the ‘all-in-one software solutions’ for investment industry

IFM Correspondent

Leave a Comment

* By using this form you agree with the storage and handling of your data by this website.