House Price Index June 2023

Falling mortgage rates over H1 2023 boosted sales and led to firmer prices. This is set to reverse in H2 as higher mortgage rates hit buying power at a time when sellers are having to accept larger discounts to asking prices.

Our view remains that 5% mortgage rates represent a tipping point, beyond which house prices will post annual price falls with lower sales volumes.

Sales momentum recovered over H1
Despite rising mortgage rates, our leading indicators of market activity are yet to register any material change.

All measures continue to run slightly above pre-pandemic levels. There are early signs of a seasonal decline in demand, which is likely to expand over the summer.

Mortgage rates falling towards 4% over the early months of 2023 supported a recovery in demand and sales.

Total new sales agreed in the first 5 months of the year recovered to within 2% of the 5-year average.

This improvement in sales volumes has led to a small increase in the 3-month rate of house price growth, reversing the quarterly price falls recorded over Q4 2022 and Q1 2023.

Sales agreed over the last 4 weeks are 8% above the average for the last 5 years as households with cheaper finance locked in look to secure homes as mortgage rates for new business spike higher.

But there are wide regional variations in underlying market conditions.

Annual house price growth to move into negative in H2
While quarterly price falls have slowed, the annual rate of UK price growth has shown a rapid loss of momentum over the last year, slowing to +1.2%.

The sales momentum seen over H1 is not going to be maintained into H2.

Higher mortgage rates will hit buying power and squeeze more buyers out of the market, bringing a return to modest quarterly price falls.

UK house prices remain on track to fall by up to 5% over 2023.

Strengthening of a buyers’ market in H2
Our data shows 14% fewer buyers in the market over the last 4 weeks than the average over the last 5 years.

However, those that remain appear committed to moving home.

This is evidenced by sales agreed running 8% above average, although with wide regional variations in the underlying supply/demand balance.

The number of new sales being agreed continues to run above the national average in Scotland, the North-East, where housing is more affordable, and in London, where price rises have under-performed.

This has made homes less affordable, exposing sales volumes to the impact of higher mortgage rates on buying power.

Our localised house price indices show a clear link between price growth and the level of actual house prices.

A third of sellers have to accept >5% off the asking price

A third of sellers have to accept >5% off the asking price

Today’s buyers are driving a harder bargain on agreed pricing.

Sellers are having to accept lower offers that, on average, are 3.8% below the original asking price, according to our data business Hometrack.

We have also seen a jump in the proportion of sellers accepting bigger discounts on asking prices recently.

More than two-fifths of sellers (42%) are having to accept offers that are more than 5% below the asking price - the highest level since 2018, when annual UK house price growth was just 1%.

Over 1 in 6 sellers are accepting discounts greater than 10% below the asking price, a level that remains more stable.

Higher mortgage rates deliver 10-20% buying power hit

Looking ahead, mortgage rates look set to remain above 5% over the coming months, delivering a further hit to the buying power of mortgage-reliant movers, who account for 7 in 10 purchases.

We have updated our analysis on the extent to which higher mortgage rates reduce household buying power for an average purchaser with a 75% loan-to-value mortgage.

Mortgage rates moving from 4% to 5% drive an 11% reduction in buying power. The gap rises to 20% if mortgage rates move from 4% to 6%.

This will not feed directly into house prices. The hit to buying power from borrowing costs rising from 2% to 4% has slowed the rate of price growth rather than driving year-on-year price falls.

Buyers can offset reduced buying power by either 1) injecting more equity into purchases and/or 2) taking longer mortgage terms.

However, these aren’t options for everyone. The more rates increase, the greater the impact on the number of buyers in the market.

Surge in supply could drive larger price falls
Aside from weaker economic growth, the main downside risk to house prices is a surge in the supply of homes for sale.

There are some signs that supply is starting to grow at an above average rate with 18% more homes listed for sale in the last 4 weeks than the 5-year average.

The number of homes for sale is back to pre-pandemic levels.

This would increase choice for buyers and create further room for negotiation on price.

Bank of England data shows mortgage arrears rates have increased off a low base in Q1 2023.

15% of mortgagees will refinance this year. These extra measures to boost forbearance for mortgagees will limit forced sales in the near term.

New sellers must be very realistic if they want to move

The desire to move home continues to be driven by a range of demographic and lifestyle factors.

The key message for anyone serious about moving in 2023 is the need to be very realistic on price, seeking the views and expertise of local agents as they plan their move.

Outlook
The resilience of the housing market and homebuyers is set to be tested once again as mortgage rates increase over 5%.

The transition to higher borrowing costs will take time to feed through. Lower sales, on track to be 20% down on last year, has been the main initial impact.

There is a large equity buffer to absorb house price falls, making the risk of negative equity much smaller than in previous downturns.

Household budgets are being squeezed and we look set for a prolonged period of very low nominal house price growth, which will see steady re-alignment of house prices and household incomes over the next 3-5 years.

Source zoopla