The property market is in a strange state at present. In the first quarter of the year, demand continued to be incredibly strong despite the economic headwinds and constricted supply. Annual house prices are up 14.3%, its highest level since 2004, inflation soared to 7% in March, and likewise the base rate rises, currently at 0.75% and expected to increase on the 5th of May, have been feeding into mortgage costs on a weekly basis. At the same time, growth in regular pay was -1% in real terms during the first two months of 2022 (ONS, 2022). These factors have been squeezing mortgage affordability as prospective homeowners can afford less and lenders begin to tighten their affordability assessments. Yet despite this, demand remains high in a limited housing pool, continuing to push up house prices in an overheated housing market. Combining this with the Ukraine war and the US on the brink of recession, it could be argued that the housing market appears to be in an unsustainable state and in need of a correction. Thankfully there are signs it is adjusting to its economic realities, albeit rather slowly.

Mortgage affordability, market uncertainty and reduced demand

House price-to-earnings ratio is currently 8.4, higher than the peak before the 2008 financial crisis (Capital Economics, 2022). Lenders have already been updating their affordability assessments to reflect the rising cost-of-living, which will most likely tighten further once energy prices, the largest contributor to inflation in the UK and Europe, feed into ONS data in June. Adding further strain, households are also faced with an increase in national insurance contributions, slow wage growth and on top of this, increasing mortgage rates as we continue along the base rate’s upward trajectory in the fight against inflation. Household disposable incomes are predicted to fall 2.2% in 2022-23, the sharpest drop in a financial year since ONS records began in the 1950s (OBR, 2022).

Aside from affordability, the Ukraine war and state of global economies, especially the US economy, who reported record inflation since 1981 of 8.5% in March, are adding to the economic uncertainty. The silver lining is that the market will benefit from a cooling of demand and house prices rises will ease as many people delay decisions to buy. This will add friction to the housing market as fewer people are inclined to sell and free up housing stock, however hopefully the rising cost of energy will incentivise homeowners of larger properties to downsize, freeing up supply to families in need of space.

Purchase Prices and Down Valuations

Faced by fierce competition for adequate property, properties going to sealed bids and bidding wars has become increasingly common, likewise the rise of the cash buyers, all a consequence of the continuing supply-demand mismatch. As a result, asking prices have risen to record levels of £354,564 in March, breaking the 350k barrier for the first time (Rightmove, 2022). What is alarming though is the late examples we are seeing from clients of down valuations, including an 8-bed HMO down valued from £345k to £250k, a residential property that went to sealed bids with the offer accepted at £861k down valued to £800k and another recent example of a residential property being down valued from £900k to £700k with the valuer explaining that the sales data in that particular locale simply did not justify the asking price. Interestingly, all of these down valuations are happening outside of the Capital where price growth has been the most significant since the start of the pandemic, and most likely will feel the burden of a house price correction. These down valuations are unusual and suggest lenders are acting cautiously, fearing what could happen to the market soon and that the cost-of-living crisis may spark a fall in property prices. The trend of down valuations indicates a current mismatch between the current condition of the market and the predictions for a slowdown later this year and next (Telegraph, 2022).

Are we be nearing the end of the property bull market and at the start of a market correction?

It seems obvious this house price boom must end; however, it is unclear when this correction will happen and at what rate.  Demand is expected to slow in the coming months putting a break on price growth and transactions, at the same time wages are catching up at a faster pace via the tight job market. We suspect house prices will be impacted relatively more outside the capital, with London being a safer investment as their prices play catchup. While mortgage rates continue to rise, the base rate remains historically low. Equally most people are on fixed rates and those remortgaging will be at lower LTV because of rising house prices. For those buying now at the top of the market should be cautious, especially when buying at high LTV amid rising rates and should seek expert advice. More clients have been opting for longer mortgage terms to protect themselves against rising rates, especially as it’s possible the Bank of England base rate could catch up with the best available rates today in a year or two. With lenders tightening affordability and rates rising fast across the board it is an important time for buyers and owners alike to seek expert advice on their options, as remortgaging now may lead to significant savings in the long term if rate rises continue.

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