Homeowners face a bitter winter

The housing market is heading for disaster as mortgage rates rise and the cost of living crisis eats away at people’s disposable income, writes Melissa Lawford

House price falls are imminent as soaring mortgage rates and spiralling living costs finally catch up with the housing market, experts have warned.

The crunch point will hit at the end of this year and bring a year-long downturn in 2023, with prices falling by 4pc, according to the Centre for Economics and Business Research, an analytics firm.

But the hit could be far worse if the looming recession brings soaring unemployment, while ever-increasing inflation pushes the Bank of England to continue raising interest rates.

Andrew Wishart, of Capital Economics, a research firm, said: “The historical record shows that increases in interest rates of the scale that we are seeing now are always a precursor of house price falls.”

Capital Economics has forecast a two-year property market downturn, with price falls of between 5pc and 10pc by the end of 2024.

Whatever happens, the blow will be unequal – with certain areas and parts of the market hit far worse than others.

TRANSACTIONS WILL TANK Estate agents are feeling pessimistic about the state of the market. In July, their expectations of property sales over the next 12 months reached the lowest level since March 2020, according to the Royal Institution of Chartered Surveyors, a trade body. This was when the housing market was shut down for the first time in history.

Excluding that lockdown low, the July forecast was the worst on record in Rics’s data, which goes back to 2012.

This followed three consecutive months of plunging buyer inquiries. Agents expect house prices will flatline over the next three months.

As mortgage rates continue to rise, the market will slow. Richard Donnell, of property website Zoopla, said: “The biggest casualty will be turnover.” He has forecast that in 2023 there will be around 1.1 million transactions, which is 200,000 fewer than this year.

“Transactions will fall, and then I think it will take six months for sellers to realise and for asking prices to come down,” said Mr Donnell. “I just think everything will flatline. Next year I think we will see house price growth at 0pc, or maybe falls of 1pc or 2pc.” In some areas, the drops could be closer to 5pc, he added.

FIRST-TIME BUYERS WILL BE HIT Sales are already falling fast – but only at the lower end of the market. In July, agreed sales of homes worth less than £100,000, and those worth between £100,000 and £200,000 collapsed. Compared to 2019, each price bracket recorded a drop of 33pc and 20pc respectively, according to data from TwentyCi, an analytics firm.

The contrast to the top end of the market is huge. Sales of homes priced between £ 700,000 and £ 800,000 were up 87pc compared to July 2019.

Part of the disjunction can be explained by house price rises: rapid growth has meant that there are fewer homes in the lowest price bracket.

“The polarisation is primarily a symptom of the fact that more and more lower income earners and firsttime buyers are getting locked out of the market as interest rates rise and the cost of living crisis bites. Meanwhile, richer homeowners, with more equity or no need for a mortgage, are much less affected.

Lucian Cook, of Savills estate agents, said: “It reflects the fact that more affluent households are typically less reliant on mortgage finance to fund their next purchase, less exposed to, and constrained by, the increased cost of borrowing, and more able to cut back on discretionary expenditure to weather the increases in the basic cost of living.”

But falling transactions at the lower end of the market are a warning sign for homeowners higher up. The falls are concentrated in the busiest sector of the market. There were roughly 10 times as many sales in the £100,000 to £ 200,000 price bracket as in the £ 700,000 to £ 800,000 bracket in July. As first-time buyers and secondsteppers stop moving house, buyer demand will decline all the way up the property ladder.

LONDON AND THE SOUTH EAST WILL BE WORST AFFECTED

Any house price falls will be focused in certain areas, where people’s finances are more stretched by mortgage repayments and rising energy bills are eating up a greater proportion of disposable income.

Martin Beck, of the EY Item Club, an economic forecaster, said: “There is a distinction between first-time buyers and older homeowners. The pain of the cost of living crisis will really be felt by lower income groups.”

More expensive properties, whose buyers are less dependent on the mortgage market and who have more savings, are more likely to hold their value. “But the properties for first-time buyers might see outright falls,” said Mr Beck.

The areas where affordability is already most stretched – namely London and the South East – are the areas that are most dependent on mortgage lending and are therefore the places likely to see the biggest property market slowdowns, said Mr Donnell. “Inner

London boroughs have already been underperforming. In real terms, prices in London are falling at speed,” added Mr Donnell.

DEMAND IS FALLING JUST AS SUPPLY IS RISING

Buyer demand – an indicator for future sales rates – is falling steadily.

In January this year, buyer demand (measured by property searches and inquiries) was 67 percentage points above the five-year average, according to Zoopla. By July, that had plunged 45 percentage points to just 22.

At the same time, the number of available listings is climbing steadily as sellers realise the housing market has peaked.

In December 2021, supply hit a low of 42 percentage points below the five-year average. By July, this gap had more than halved. The number of listings is now only 20 points below the five-year benchmark.

This closing of the historic supply/demand imbalance could bring a stop to house price growth and usher in falls.

Rising mortgage rates will also seriously constrain how much would-be buyers can borrow and therefore offer on a property. Mr Donnell said: “The difference between being able to buy at a mortgage rate of 2.5pc and 4pc creates a serious step up in spending. By the end of this year and the start of next year, the mindset of consumers will change when it comes to moving.”

As homeowners come to the end of their fixed-rate deals, supply could rise further as they find their homes become unaffordable due to soaring mortgage rates, and so they have to sell up.

Karl Thompson, of the CEBR, said “We have seen significant changes this year in terms of the cost of living crisis in shops and rising bills. But the impact on mortgages will be slower. A significant number of homeowners are rolling out of fixed-rate deals this year, but that number will increase and increase next year.”

REPOSSESSIONS WILL CLIMB AS THE RECESSION BITES

Just as mortgage repayments get much more expensive, borrowers may also become more likely to lose their jobs when the recession bites. “The big question is will unemployment go up,” said Mr Donnell.

Pantheon Macroeconomics, an analyst, has forecast that the unemployment rate will jump from 3.7pc at the start of this year to a peak of 4.6pc for almost the entirety of 2023, as the incoming recession takes hold.

The combined hit of job losses and higher interest rates mean that mortgage repossessions are about to surge, said Mr Thompson.

Across 2023 and 2024, 62,117 people will have their homes repossessed, according to the CEBR’s forecasts. That is roughly the number who lost their properties across the three-year period from 2017 to 2019 combined.

The blow will be unequal with certain areas hit worse than others