For years, home ownership in Britain has been a one-sided bet. Prices have risen steadily since the global financial crisis, increasing even more after the start of the pandemic.
Fueled by a post-lockdown buying spree, the average UK house price hit a record £275,000 ($315,474) in December, an increase of £27,000 from the year’s high former. people who buy the houses have for the first time benefited from tax cuts on their purchases and even though the houses were more expensive, the lower mortgage rates kept the monthly payments affordable.
Prices have increased every year since 2012, when they fell by 1.1%, according to Nationwide data, a major mortgage lender. Now that boom is over.
It was already fading long before Liz Truss and Kwasi Kwarteng blew up the UK bond market and sent borrowing costs skyrocketing. But turmoil in financial markets sparked by plans by the former prime minister and her then finance minister for unfunded tax cuts made matters worse.
The sharp and sudden increase in mortgage rates that followed made buying a home much more expensive, leading some forecasters to forecast prices falling 10-15% over the next year.
Even as most of Truss’ tax cuts were scrapped by new finance minister Jeremy Hunt and Prime Minister Rishi Sunak, calming bond markets, the era of cheap debt that has helped push prices higher real estate is coming to an end.
On Thursday, the Bank of England raised its key interest rate by three-quarters of a percentage point – the biggest rise in 33 years – to 3% from nearly zero at the end of the year last. This is the highest level since November 2008.
This will keep mortgage rates high, even if they are not at their current inflated levels.
“I think all that can happen in the short term is that we get back to where we were at the end of August,” said Tom Bill, head of UK residential research at brokerage Knight Frank. “There is a bigger and broader psychological shift that needs to take place after 13 years of ultra-low borrowing costs and the readjustment of the housing market to mortgage rates that are no lower than 1% or 2%. »
Mortgage rates in the UK have risen since the spring, in line with rising interest rates. But Truss and Kwarteng’s Sept. 23 “mini” budget kicked those increases in the bud.
“The mini budget added a whole percentage point to mortgage rates,” said Richard Donnell, executive director of research at online property portal Zoopla.
The promise of sweeping tax cuts but no plan to pay for them caused a bond market rout that drove up borrowing costs for lenders. “The biggest immediate impact has been the accelerated pace of mortgage rate movement,” said David Hollingworth, associate director of communications at brokerage L&C Mortgages.
Within days, lenders withdrew more than 1,500 products and more than half have still not returned to the market, according to financial product comparison website Moneyfacts.
Even though Kwarteng and Truss are out, along with most of their tax cuts, mortgage rates have still not fallen back to where they were before the pair unveiled their doomed economic plan.
Average two- and five-year fixed rates stood at 6.47% and 6.32% on Tuesday, levels not seen since 2008. That compares to around 4.75% before the “mini” budget, according to Moneyfacts.
For a typical borrower, with a mortgage worth 70% of the price of their home, this would increase monthly repayments by £500 ($574), according to Donnell.
The dramatic rate reset has seen some homeowners spend thousands of pounds to refinance early for fear rates will climb even higher.
Karam Heer, a London-based tax adviser, decided to refinance his two-year fixed mortgage a year ahead of schedule, raising his rate from 1.75% to 3.57%. It will cost him an additional £375 ($424) per month until January 2028.
“We didn’t really have a choice,” he said. Even though it cost him £4,500 ($5,162) To change the deal early, Heer wanted the certainty of a fixed rate because, as he told CNN Business, “I have absolutely no idea what’s going to happen with interest rates.”
Tudor Nanu and his wife, who bought a house in February, plan to do the same. Healthcare workers in South East England are preparing to take a charge of £6,000 ($6,883) to refinance early at a rate almost double what they paid. The higher rate would cost them an extra £500 ($574) per month, on top of the one-time refinance hit.
Yields on government bonds fell in October and swap rates – an indicator of banks’ funding costs used to set mortgage rates – are also down. This means that mortgage rates are expected to fall over the next few weeks.
Still, there’s no going back to the “ultra-low levels of the past few years,” said Donnell, who believes mortgage rates of 4% to 5% will become the new normal.
This will shock millions of homeowners who bought homes when rates were much lower. According to Knight Frank’s Bill, more than 4 million mortgages have been granted to first-time buyers since 2009, when rates “bottomed out”.
“So there are a lot of people who don’t appreciate what it’s like when their monthly expenses go up,” he told CNN Business.
As many as 1.8 million borrowers on fixed-rate mortgages will need to refinance next year, according to the Resolution Foundation, a think tank. Neal Hudson, housing market analyst at research firm BuiltPlace, estimates that around 300,000 fixed-rate transactions will close between October and December.
“As more buyers come up against the reality of monthly mortgage bills rising by hundreds of pounds, the financial pain will spill over into the housing market,” Bill added.
Signs of a slowdown are already starting to appear, as banks take a more cautious approach to lending and aspiring buyers delay purchases in the face of much higher borrowing costs.
UK house prices fell 0.9% between September and October, the first drop in 15 months, according to data from Nationwide. The average home now costs £268,282 ($309,396).
Mortgage approvals also fell to 66,800 in September from 74,400 in August, according to data released Monday by the Bank of England.
Donnell from Zoopla said demand from new buyers has dropped 30% since the Truss budget. “Right after the mini budget there was a scrabble to close deals, now sales are still happening, but at a 20% lower run rate than they normally would be,” he said. he declares.
Alan Edwards, a local government worker in the north of England, was about to start looking for a house, hoping to buy early next year until the mini budget does raise mortgage rates.
“I don’t see that happening now,” he told CNN Business. Edwards expected rates to rise over the next few months, but not “as fast as fast,” he said. “We really have to pay attention to the government now because they can drive up our costs by having a bad week on their own initiative.”
Those who buy will not be able to borrow as much, which will cause prices to fall. Take, for example, someone who a year ago could afford to put down £1,500 ($1,700) a month for a 25-year contract. mortgage. At an interest rate of 1.75%, the lowest reached in September 2021, this person could have borrowed £378,000 ($433,000). Today, at an interest rate of 5.5%, the monthly payment is only enough for a mortgage of £244,500 ($280,000).
A decline in purchasing power makes a significant drop in property prices inevitable, according to Andrew Wishart, senior economist at Capital Economics. The board expects prices to fall between 10% and 15% by 2024. Credit Suisse made a similar projection.
It’s a wider problem for the UK economy, given that 36% of household wealth is tied to property, according to data from the Office for National Statistics. When house prices fall, homeowners feel less confident about their personal finances, causing them to cut spending and delay additional investments.
Homeowners may already be consolidating their finances, saving more for higher mortgage payments. Households deposited an additional £8.1bn ($9.3bn) with banks and building societies last month, up from £3.2bn ($3.7bn) in August, the biggest increase since June 2021, Bank of England data shows.
Even if falling house prices simply bring prices back to where they were before the pandemic-induced buying frenzy, it will still hit the UK economy hard, as many sectors of the economy, services financial and construction companies to moving companies and furniture stores, depend on a strong and active housing market.
A 2020 analysis by Knight Frank and the British Property Federation found that for every 100,000 real estate transactions involving existing homes, the UK economy benefited to the tune of almost £1 billion ($1.14 billion) .
“Rising debt payments, falling house prices and collapsing construction will play a major role in dragging the economy into recession,” Wishart said.