UK house price inflation (Annual): +1.2%

Sellers accepting a 5% discount on the asking price: 42%

Hit to buying power from mortgages rates rising to 5%: -11% 

Following a promising start to 2023, the affordability situation for prospective homebuyers has worsened in recent weeks. Persistently high inflation has caused concern in financial markets, leading to expectations that UK interest rates will reach their peak at 6%. Mortgage rates have risen by more than 1%, now averaging between 5% and 6%, compared to less than 4.5% earlier this year.

Our perspective remains that mortgage rates of 5% mark a critical threshold, beyond which house prices will experience annual declines accompanied by below-average sales volumes. This report delves into the latest trends and concludes that we are still on course for price decreases of up to 5% in 2023.

The early months of 2023 witnessed a decline in mortgage rates, reaching around 4%, which contributed to a recovery in demand and sales. Additionally, UK consumer confidence has rebounded over the past five months, supported by a strong labour market, rising earnings, and decreasing energy prices.

In the first five months of the year, the total number of new sales agreed nearly reached the 5-year average, with a difference of only 2%. This increase in sales volume has resulted in a slight upturn in the 3-month rate of house price growth, reversing the previous decline observed in Q4 2022 and Q1 2023.

Recent indicators from other sources have also displayed a similar pattern, suggesting that mortgage rates below 5% are in line with house price inflation fluctuating within the range of +/-2%.

Over the past four weeks, the number of sales agreed has exceeded the average of the past five years by 8%. This can be attributed to households taking advantage of lower financing costs to secure homes, even as mortgage rates for new businesses begin to rise. However, it's important to note that there are significant regional variations in underlying market conditions.

In the last two weeks, there have been early indications of a decline in demand, with levels dropping below those seen in 2019. This downward trend is expected to continue throughout the summer.

Although the rate of quarterly price declines has slowed down, the annual growth rate of house prices in the UK continues to decrease rapidly and currently stands at +1.2%. Across different regions, house price growth varies, ranging from +2.5% in Wales to -0.8% in Northern Ireland. Average prices in London have experienced a slight decrease of -0.2%, while other areas show minimal positive price growth.

The sales momentum witnessed in the first half of the year is not anticipated to be sustained in the second half. The impact of higher mortgage rates will reduce buying power and push more potential buyers out of the market, resulting in a return to small quarterly price declines during the latter part of the year. The overall trend suggests that UK house prices are still projected to decrease by up to 5% throughout 2023.

Based on our data, there has been a 14% decline in the number of buyers in the market during the past four weeks compared to the average of the previous five years. However, those who are still actively seeking properties seem determined to proceed with their plans. This can be seen through the number of sales agreed, which is currently running 8% above the average, although there are notable regional variations in the underlying supply and demand dynamics.

In Scotland, the North East, and London, where housing is relatively more affordable or where price increases have been lower, the number of new sales being agreed continues to exceed the national average. However, in most English regions, where house prices experienced significant gains during the pandemic years, sales volumes remain at or below average. This has resulted in reduced affordability, making homes less accessible to buyers and exposing sales volumes to the impact of higher mortgage rates on their purchasing power.

Our localised house price indices reveal a clear correlation between price levels and buyer activity. Particularly, areas with prices surpassing £350,000 are more likely to experience further price declines. The East of England, South-West, East Midlands, and South-East are regions where house prices are expected to undergo more substantial adjustments.

A significant number of sellers are facing the need to compromise on pricing, with 2 in 5 sellers having to accept discounts of more than 5% off the original asking price. Recent data indicates that buyers in today's market are driving a harder bargain, resulting in average offers that are 3.8% below the initial asking price.

Furthermore, there has been an increase in the proportion of sellers who are accepting larger discounts on their asking prices. Currently, over two-fifths of sellers (42%) are having to agree to offers that are more than 5% below the asking price, marking the highest level since 2018, when annual house price growth in the UK was only 1%. Additionally, more than 1 in 6 sellers are accepting discounts exceeding 10% below the asking price, a level that has remained relatively stable.

In the foreseeable future, mortgage rates are expected to remain above 5%, which will further diminish the buying power of homebuyers who rely on mortgages for financing, representing 7 out of 10 purchases. However, if expectations in the money market change, mortgage rates could potentially start to decline.

We have conducted an updated analysis on how higher mortgage rates affect the purchasing power of an average buyer with a 75% loan-to-value mortgage. Transitioning from a 4% to a 5% mortgage rate results in an 11% reduction in buying power. If rates were to move from 4% to 6%, the gap widens to 20% in terms of reduced buying power.

It's important to note that this reduction in buying power does not directly translate to house price changes. The impact of higher borrowing costs, such as rates increasing from 2% to 4%, has primarily slowed down the rate of price growth rather than causing significant year-on-year price declines. Additionally, lower sales volumes have somewhat concealed the impact.

Buyers have the option to offset the reduced buying power by either injecting more equity into their purchases or opting for longer mortgage terms. However, these choices may not be suitable or feasible for everyone. As mortgage rates persist above 5% for longer periods, the impact on the number of buyers in the market intensifies, which in turn affects sales volumes and price inflation.

Apart from weaker economic growth, a significant risk to house prices lies in a surge of homes being listed for sale. There are indications that the supply of homes is starting to grow at a rate above the average, with 18% more homes listed for sale in the past four weeks compared to the five-year average. The number of homes available for sale has returned to levels seen before the pandemic. If the supply of homes continues to expand, either voluntarily or partially due to changing circumstances, it would lead to an increase in options for buyers and create more opportunities for price negotiation.

Data from the Bank of England reveals a rise in mortgage arrears rates during Q1 2023, albeit from a low starting point. According to industry insiders, borrowers are mostly managing to meet the additional monthly mortgage costs through refinancing rather than extending their mortgage terms. Around 15% of mortgagees are expected to refinance this year. These additional measures to support mortgage forbearance will restrict the number of forced sales in the near future.

The decision to move homes is influenced by various factors, including demographics and lifestyle considerations. It's important to note that the desire to move is not solely driven by aspirations for a larger or better property. We anticipate that the increasing costs of living and housing will prompt homeowners to reassess their housing requirements, leading some to choose to move as the best option, either by choice or necessity.

Regardless of the motivations behind a move in 2023, it is essential for prospective sellers to adopt a realistic approach when determining the price of their property. Seeking the insights and expertise of local agents will be instrumental in ensuring an accurate assessment of the property's value as they navigate the process of planning their move.

The housing market and homebuyers will face a test of resilience as mortgage rates rise above 5%. The stronger pricing observed in the spring indicates that mortgage rates of 4-5% are manageable. However, if rates remain above 5% and approach 6%, the impact on buying power will intensify, leading to lower prices and sales volumes. It will take time for the effects of higher borrowing costs to fully manifest, and the initial impact has been evident in reduced sales, which are projected to be 20% lower than the previous year.

The presence of a significant equity buffer mitigates the risk of negative equity, reducing the likelihood of previous downturn scenarios. However, the primary challenge for housing activity lies in the affordability of monthly payments for buyers and those seeking to remortgage, considering the broader increase in living costs. Household budgets are under pressure, and a prolonged period of low nominal house price growth is expected. This will facilitate a gradual realignment of house prices with household incomes over the next 3-5 years.

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