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Politics affecting rise in borrowing costs

The political and economic turmoil over the last few weeks/months meant the average mortgage rate spiked at around 6%. However we have seen that drop to around 5.4% in the past week. There are of course better rates out there, this is based on an average 5 year. Of course the health of the property market is linked to the health of the economy, most being the cost of borrowing. Looking ahead within the property market there are various elements to consider. First, the lifestyle factor of your area. Second, the mortgage rates heading into 2023.

Uncertainty has paused new buyers

The sudden increase in mortgage rates gives new buyers the highest increase since the late 1980s. Due to this the measure of new buyer demand has fell by a third since the mini-budget, down 33%. This has caused those that didn’t have pre-arranged mortgages or loans at better rates to sit on the fence for a short while, waiting on the rates to potentially balance out. A fall in demand isn’t unusual for this time of the year, we tend to see a lull before the increased demand throughout the Christmas/New year period. The drop in buyer interest has been spread uniformly across all markets. However, those with cheap borrowing secured (normally smaller loans), as well as cash buyers, are continuing to make offers and agree sales, albeit at a slower rate than this time last year, down 25% on a year ago.

Demand remains

Demand to move remains. Those that rushed to secure lower rate mortgages prior to the mini-budget saw approvals in August up by 17% in that one month. This demonstrates that households still have great desire to move, driven by the pandemic and lifestyle factors.

Good-sized pipeline of sales remain

Yes there has been a shock in demand over the last 6 weeks, however we come to an end of a very strong year with circa 293,000 sales in the pipeline, most of which are expected to complete. Fall-throughs have increased this year however, mainly a result of a lack of affordable finance but we are still on track for nearly 1.3m sales in 2022.

No sign of pricing impact

I’m not expecting to see any price impact from the outcome of the above. Typically, it would take months for pricing to adjust due to weaker demand. The available homes to purchase on market remains below, this will support pricing over the coming months. The price index shows average house prices have increased by 8.1% over the last year. This is due to the strength of demand and sales agreed over the last 6 months, which continue to push prices higher in the face of an ongoing shortage of homes for sale. The rate of growth is slowing in all areas of the UK, due to the mortgage rates and uncertainty of course.

Will the hit to buying power affect 2023?

This will mainly hit over-valuation’s by agents/owners, with the increased rates of course a buyer will not be willing to pay that 5% over-value they may have considered early in 2022. A rapid reversal in mortgage rates would have the greatest impact, this could be accelerated if the drop by 5% of over-valuations is reduced also.

Mortgage rates will drop through 2023

Mortgage rates are likely to move back towards 4% by the end of 2023 is most likely, along with a 5% fall in prices would reverse most of the current over-valuation by the end of 2023. At present, this is most probably the most likely outcome. Remember this doesn’t mean your home has dropped by 5% in value, it just means people are unwilling to pay a 5% premium they may have been willing to in certain areas.

What happens if mortgage rates stay at 6% average

This is the less likely outcome of 2023, however were mortgage rates to stay above 6% for the majority of 2023 then UK house prices would need to fall back to reflect the hit to the purchasing power of those using mortgages. This would likely cause around 10% drop in pricing (including the 5% over-value), meaning large on-paper gains throughout the pandemic would be lost, however, still leave you in positive equity in comparison to pre-pandemic.

Half of sales are cash or small-sized mortgages

Range of mortgage products and cost are important for most buyers. However, half of all sales are paid for by cash or using a mortgage that is small relative to the value of the property. These buyers will see less of a hit to buying power than those using larger loans due to appealing rates still for lower borrowing. First time buyers or those looking to move up the ladder are the ones who have seen the biggest hit with the mortgage rate increase, as the larger the loan the higher the rate.

Moving forward

The spike in mortgage rates has delivered a  reality check for home buyers and sellers. Demand has fallen, however is still strong in comparison to times pre-pandemic, there are some sitting on the fence for the remainder of 2022 to see where mortgage rates go. The broader motivations to move home will remain into next year supported by pandemic-driven factors and cost of living pressures. For many households it will come down to what they can get for their home and what this value unlocks for their next move. I would expect growth to nearly freeze over the remainder of 2022 with buyers sitting on the fence due to rates. While the focus is on mortgage rates, the labour market remains robust and wages continue to increase, albeit failing to keep pace with the rising cost of living. The proposed cut to National Insurance and support for energy bills will offset some of the pressures on incomes. The housing market in 2023 looks set to be one of readjustment as we return to normal levels of mortgage rates.