Summer rate hikes threaten to push UK housing market to breaking point
THE UK housing market is facing new hurdles after being rocked by the worst cost-of-living crisis in a generation, economic uncertainty and soaring borrowing costs.
The pressure is building fast amid a fresh jump in mortgage rates and a rush by lenders, including HSBC and Banco Santander, to pull products as bond yields rise to levels last seen in 2008. That is setting up borrowers and homebuyers for a nerve-racking summer where interest rates keep rising, loans get more expensive and good deals become harder to find.
The big concern is that the current downturn picks up steam as those pressures mount. Economists already see home values falling close to 10 per cent peak to trough, and the market is not even halfway to that point. Two-year mortgage rates are near 6 per cent, above a level that Richard Donnell, executive director at property portal Zoopla, called a “tipping point” for housing.
There is a crucial moment approaching next week, when inflation figures and a Bank of England (BOE) policy decision could combine to compound the damage to the market, and set the scene for larger price declines.
Faster-than-expected price growth would heighten speculation that the BOE will have to tighten monetary policy even more than anticipated. That would have huge repercussions for UK property, where mortgage approvals are already near the weakest since the global financial crisis.
Within the industry, the mood had turned a little less downbeat recently, with property surveyors softening their negativity about house prices and the outlook for the market.
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But this week, the reasons to worry regained the upper hand. On Monday (Jun 12), Santander paused some mortgage deals for new borrowers, while NatWest Group increased prices.
The average UK two-year fixed-rate home loan surged to 5.9 per cent, according to Moneyfacts Group. That is the highest since December, when rates were easing back after an ill-fated government Budget fuelled a market meltdown.
On top of that, faster-than-expected wage growth on Tuesday pushed traders to ramp up bets on future BOE hikes. The central bank has already jacked up its key rate by 440 basis points (bps), to 4.5 per cent. Another 25 bps at the Jun 22 decision is seen as sewn up, but that is unlikely to be the end.
On Tuesday, market pricing suggested the rate would hit 5.75 per cent this year, with a chance of 6 per cent by early 2024.
With so much UK consumer wealth tied up in property, what happens in the £8.7 trillion (S$14.7 trillion) market can have knock-on effects across the economy. The property ladder is a British obsession, and a slowdown can quickly revive fears of a repeat of previous crashes.
UK Treasury Minister Andrew Griffith told parliament on Tuesday that the government “recognises the anxiety people have about mortgages” and is doing what it can to help.
“Higher inflation and expectations of higher interest rates and a knock-on into higher mortgage rates will continue to squeeze buyer demand,” Zoopla’s Donnell said. “The longer rates stay above 5 per cent, and closer to 6 per cent, then the greater the likelihood of double-digit price falls.”
Borrowers will be hoping for a reprieve in next week’s inflation reading. April’s figures shocked investors and May’s will provide clarity on whether that was a blip or the start of a more worrying trend, particularly in underlying prices.
“All eyes will be on what happens to core inflation,” said Lucian Cook, head of residential research at broker Savills. “This is fundamental to future variable and fixed-rate mortgage costs, and will be the primary concern of first-time buyers and upsizers who are the bedrock of housing demand.”
Data from the Nationwide Building Society showed prices fell almost 5 per cent from their peak last August, cooling a red-hot market after a government tax cut fuelled demand during the pandemic. Still, even a 10 per cent drop would only partly erase the gains made since the government stimulus was introduced in the summer of 2020.
The scale of the UK price declines has been relatively tame so far, but the direction of the market is clear. An index by lender Halifax showed values posted their first year-on-year decline since 2012 in May. Loan approvals slowed to 49,000 in April, capping the weakest six-month period since 2009, excluding the first pandemic lockdown.
And that is before most households have yet to feel the pain of higher borrowing costs. BOE governor Andrew Bailey estimated that just a third of the central bank’s aggressive rate increases have fed through to mortgage holders so far.
About 1.3 million borrowers will have to renew their fixed-rate deals between April and the end of 2023. That means pressure on housing will intensify, though it may not cause widespread distress to households.
For one, long-standing structural issues, particularly a lack of housing supply, mean there is likely to be a floor to how low prices can go. In addition, unemployment is below 4 per cent and the labour market is still tight, limiting the number of forced sellers from job losses.
Philip Shaw, chief economist at Investec Bank, said potential sellers would not willingly accept prices they were not happy with, meaning sales volumes may take the strain, rather than prices.
“Households will say ‘Oh, my house is worth more than that, I’m not selling it for that so if I can’t, I won’t move’,” he said.
Mortgage holders also may be able to better handle the cost of pricier loans, as lenders will have already “stress tested” many borrowers under a stricter lending regime introduced in the wake of the 2008 financial crisis.
Borrowers “have had to prove that they could afford large rises in mortgage rates”, said Grainne Gilmore, director of research at property consultant Cluttons. “Their lender has already checked they could afford a 3 per cent rise in interest rates.” BLOOMBERG
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