After a frenetic 2022, during which house prices hit record levels over the summer and economic turmoil ensued shortly after, the current situation is thankfully much less febrile.
Nevertheless, certain facts about the wider UK economy are irrefutable: for now, inflation remains stubbornly fixed in double digits.
Of course, the property bulls and bears continue to take opposite positions about what all of this may mean for the future direction of UK property prices.
Optimists suggest that a dramatic crash has been averted as current mortgage rates are predicted to fall as much as 25 per cent by the year end.
They also point to several of the UK’s largest lenders – including HSBC, Barclays, Lloyds Banking Group and NatWest – agreeing forbearance measures with the government to help struggling borrowers. These come in anticipation of a surge in late mortgage payments as 1.8mn people will need to re-mortgage when their fixed-rate deals expire this year.
Despite some media hype that banks are reducing their mortgage lending, there is still an appetite to lend. Such measures, last used during the 2008-09 global financial crisis, are an attempt to avoid repossessions and alleviate borrowers’ financial pain. They include switching mortgage holders to interest-only deals or to competitive fixed-rate deals without an affordability test being required.
People have come round to the idea that the era of low interest rates is now over.
Shifting economic sentiment
According to Schroders, the average house in the UK currently costs more than eight times average earnings; in London, the ratio reaches 11 times salary.
However, the increased unaffordability of mortgages relative to net incomes, which are subject to both an inflationary and a fiscal squeeze, is being helped by the lower interest rates we are seeing lenders offering.
Although the negative stories of crashes and recession make for good headlines, the polarised views that they fuel are on the wane. To some degree, macroeconomic sentiment has begun to shift, albeit glacially, from one of uniform gloom to a slightly more nuanced outlook that is arguably more focused on logic than fear.
As a leading indicator of where things are headed in corporate earnings, for example, UK equity markets have been back on an upward trajectory for the past three months.
These interest rates are perhaps the most critical element in the property equation since short-term swings directly impact affordability.Notably, the shift in economic sentiment has been reflected by a simultaneous retreat in average rates for new two-year and five-year fixed mortgages; after rising from around 3 per cent a year ago to spike at 6.5 per cent last October, they have now fallen back towards the 5 per cent mark.
From a potential buyer’s viewpoint, these interest rates are perhaps the most critical element in the residential property equation since short-term swings directly impact on affordability, and in turn lenders’ willingness to lend.
After a remarkable 13 years of near total interest rate stability, the sudden and sharp swings of the past few months have been particularly dramatic.
Mortgage market is still kicking
Recent announcements from a clutch of lenders – Santander, Barclays, Nationwide and Halifax – point to a further reduction in rates to average around 4.5 per cent, with lenders offering the lowest rates to lower loan-to-value borrowers who pose less risk.
The mortgage rate cuts by some of the biggest commercial retail lenders provide proof that the market is potentially going to become more attractive and more affordable for domestic and first-time buyers – and not just to overseas or cash buyers as was the case when rates hit their recent highs.
Despite some media hype that banks are reducing their overall mortgage lending, there is still an appetite to lend.
Whenever the UK property market is reported to be down, history shows that it is never down for too long.A lot has happened in short space of time. The Bank of England’s benchmark lending rate had nine consecutive hikes in the year to December 2022, rising from 0.25 per cent to 4.25 per cent – its highest level for 14 years.
The obvious corollary has been a lull in market activity and the start of a decline in property prices, which may or may not accelerate in the coming months.
But much of this has seemingly been digested by the market, leading to stabilisation as people are beginning to accept the ‘new norm’ in interest rates. After a series of shocks, there is instead a greater sense of calm and equilibrium. Also industry professionals can now more confidently gauge and advise on where rates may end up in the medium term.
It should not be forgotten that whenever the UK property market is reported to be down, history shows that it is never down for too long. If buyers have available funds or funding, they should press ahead and not potentially lose out on properties that they really like and want.
Good property stock is not always around; in busier markets, people tend to lose out thanks to an increased level of competition. The only people still waiting should be those who are not yet financially able to buy.
There is an important caveat in this assessment: growth in real incomes.
Since interest rates are still relatively high, at least in the context of recent history, the market may well remain more attractive to overseas and cash buyers until UK incomes begin to increase in real terms, adding to the purchasing power of domestic UK buyers.
Goli-Michelle Banan is head of residential real estate at solicitors Lawrence Stephens
