Unsafe as houses: how far will UK property prices drop and how long will they stay there?

As prices, mortgage approvals and home sales fall, the party is finally over in the housing market

Declining house prices and mortgage approvals could spell a long, hard winter for the UK housing market. PA

It has been a summer to forget for the perennially sunny British estate agent and with a distinctly chilly wind blowing through Britain's housing market, the coming winter is looking decidedly glum.

Successive rises in interest rates by the Bank of England, falling affordability and the lingering cost of living crisis have been weighing on house prices for months and the cracks are really beginning to show.

Earlier this week, the Bank of England announced that Britain's lenders had recorded a fall in the number of mortgage approvals in July to 49,444, down from 54,605 in June. The figure was significantly below the 51,000 predicted by economists and is the lowest since February.

Something had to give, and it is prices. The respected Nationwide survey on Friday said August prices were down 5.3 per cent year on year, a reverse not seen since 2009 following the financial crash.

However, many analysts point out that summer is a slow time for house buying. For Stephen Perkins, managing director at Yellow Brick Mortgages, the numbers are “not a big surprise”.

“The confidence to buy simply isn't there right now” he said. “Many people seeking to remortgage are having to stay with their existing lender due to affordability and criteria restrictions.

“Fortunately, as lenders are desperate to hit lending targets, as seen by the recent rate reductions, they are offering very competitive rates for customers to stay with them at present.”

In what may seem counterintuitive, banks and building societies have been reducing mortgage rates on many of their products recently, despite economists forecasting a 15th and possibly a 16th rise in UK interest rates.

For example, even though the Bank of England is widely predicted to increase interest rates at least once more before the end of the year, Barclays announced this week that it was “taking advantage of a fall in the cost of market funding by reducing rates on a selection of products.”

The mortgage market takes its cue from swap rates, which are heavily influenced by the longer-term outlook for the economy.

While the likelihood is that the Bank of England will increase rates to around 6 per cent by early next year, swap rates will take their cue from the fact that inflation is heading lower.

“The worst of the pain may not be over with the markets expecting the Bank of England to raise the base rate again next month,” said Mark Harris, chief executive of mortgage broker SPF Private Clients.

“Swap rates, which underpin the pricing of fixed-rate mortgages and have been exceptionally volatile in the past couple of months, have settled down since the encouraging dip in inflation.

“A number of lenders have been reducing their fixed rates and borrowers will be hoping others follow suit in coming weeks.”

But while lenders may be lowering their mortgage rates as much as is competitively possible, it still may not be enough to incentivise borrowers who continue to be faced with issues of affordability. Hence the fall in the number of approvals.

In addition, there are fewer players on the field – demand is falling because many would-be buyers are sitting on the side lines waiting to see if prices fall even further. This in itself leads to a fall in properties coming on to the market.

As such, mortgage brokers and real estate agents are looking at a housing market where activity has dropped off sharply.

“The property sector continues to falter as rate rises suck all of the confidence out of the market,” said Samuel Mather-Holgate at Mather and Murray Financial.

“Sellers are having to slash their prices, and those that don't are hanging around on property portals like rotting meat in the desert.”

First-time buyers

First-time buyers are caught between a rock and a hard place.

A recent survey by the Royal Institution of Chartered Surveyors (Rics) found that lettings agents expect rents to rise significantly over the next three months.

On the other hand, mortgage costs have been rising too and the cost of living crisis is far from over.

“First-time buyers are having a tough time at the moment,” Alice Haine, personal finance analyst at Bestinvest, told The National.

“Rents are ramping up but so are mortgage costs, making it very hard to decide whether getting on the property ladder is actually cost-effective.

“Some first-time buyers might decide to pause buying plans until rates ease slightly or property prices fall more dramatically.”

Homes sales plunge

But even if a would-be buyer is able to secure a mortgage deal at the right cost, there's the problem of finding a property to buy.

Home sales in Britain are on course to reach their lowest levels in 11 years, according to research this week by Zoopla.

The property website estimates that the number of sales involving mortgages will fall 28 per cent over the course of 2023.

“It is the number of sales that have been hit hardest by higher borrowing costs, especially among mortgage-reliant buyers,” said Richard Donnell, executive director at Zoopla.

“House price growth has slowed rapidly over the last year as demand weakens,” he added.

How far that demand and prices weaken is a subject of much debate.

Not only is the Bank of England predicted to increase interest rates to 5.75 per cent or 6 per cent within the next six months, but analysts forecast that once rates peak, they will stay high for longer than was predicted just a year ago.

It's now thought interest rates will only start to come down from the middle of next year, to around 4 per cent by the end of 2024.

Households will also see little relief on other fronts – inflation will continue to push prices higher, albeit at a less dramatic rate, and energy bills will rise as winter approaches.

Meanwhile, HMRC figures released on Thursday showed there were 86,510 residential transactions in the UK in July, 16 per cent lower than in the same month last year.

While there was a slight increase between June and July (1 per cent), HMRC noted that the numbers represented sales completions, which usually take between two to four months after an initial offer is made on a property.

“The property market is a shadow of what it was last year,” said James Bull of JB Mortgages.

“The fact that transactions in July 2023 were down sharply compared to July last year says all you need to know about where the market is at.

“Throughout the year, the purchase market has really slowed as the impact of higher mortgage rates has kicked in.”

Nicholas Christofi, managing director of Sirius Property Finance, said the next few months will be key to the direction of the housing market.

“Of course, it's important to remember that there is a seasonal element at play during the summer holiday period and this could be a contributing factor behind a reduction in market activity,” he said

“So, it will be interesting to see where we stand over the coming months as we approach what is traditionally a busy time of year in the run-up to Christmas.”

Pockets of support

But the cooling housing market is getting some support.

Rising mortgage rates and falling yields have made the buy-to-let market a harder place in the past year. As such, first-time buyers with enough financial clout have been able to snap up some bargains as landlords put their properties up for sale.

“Ultimately, it will come down to first-time buyers looking to escape rising rents or homeowners that need to sell, either because of death, divorce or rising debts, that will keep the housing market moving in the short term,” said Ms Haine from Bestinvest.

Also, debt-free house hunters, although relatively rare, are playing their part in supporting activity in the market.

Cash sales are not expected to drop much this year, especially in the cheaper markets in the north of England and parts of Scotland.

“Cash buyers are more immune and on track to account for more than one in three sales in 2023,” said Mr Donnell from Zoopla.

However, he added: “Rates need to fall below 5 per cent before we see an increased appetite to move home in the second half.”

'Sensibly priced properties'

Despite pockets of buoyancy, the UK housing market is experiencing a marked slowdown, and there are few signs of improvement in the near future.

Nonetheless, some experts don't see a gloomy picture, rather one of resilience in the face of higher borrowing costs, inflation and other cost-of-living pressures.

“Buyers have become used to the higher-rate lending environment, and many sellers are pricing their properties accordingly,” said Nicky Stevenson, managing director at estate agent group Fine and Country.

“Sensibly priced properties continue to attract a lot of interest, while smaller homes in affordable locations are proving the most popular.”

Gone are the heady days of 2021, when the price of the average house grew around 10 per cent, or £27,000.

Perhaps symbolic of the entire state of the UK housing market is the fate of the house-builder Persimmon, whose shares have lost 13 per cent of their value this year.

The week, it was announced that after 10 years the company's shares will leave the premier league of the London market, the FTSE Index of top 100 shares.

Relegation to the midsized FTSE 250, illustrates the waning fortunes of Britain's home builders and commercial real estate developers.

But there's always hope, both for the company and the housing market. Persimmon was kicked out of the FTSE 100 in 2008, following the financial crisis, only to re-join five years later.