Property prices and interest rates – summer 2023 review

With mortgage and interest rates at some of their highest rates in 15 years and a notable contraction in mortgaged house purchases, it’s a troubling time for home buyers.

We’ve taken a look at the recent reports around the property market and mortgage sector to identify the good news as well as the bad.

We’ll start with the housing market. Data supplied by HMRC has recently been published showing that overall property transactions in the UK are down 9% year on year.

This is interesting as, on face value, the total number of sales month on month was actually up from May to June (by 28%), but when we include the seasonal variations of the property market, and adjust accordingly, this figure drops to only 6%. Even though small, that does still represent an uptick.

If we also bear in mind the post-pandemic property highs, and assume that they were especially volatile in their measurement, the picture is perhaps not as gloomy as we would first assume.

The reason for the property market change is, in no small part, down to the increase in the Bank of England’s base interest rate, and the impact this has had on mortgage interest rates. Put simply, higher mortgage rates, are reducing buying power for prospective purchasers, and making the cost of home ownership higher.

This is resulting in a more cautious attitude from prospective home-movers, who are choosing not to move whilst mortgage rates are so high. The simple knock on effect of this is a detrimental impact on house prices, with fewer prospective buyers and weakening demand with more houses remaining available.

This effect has been most prominent in more expensive areas of the UK, such as the South East, and experts suggest in total house prices will fall by c.5% in 2023 across the UK.

The reduction in house prices is clearly linked to the increase in interest rates, and the forecast is that the worst of this will be realised imminently. Indeed average mortgage rates have recently dropped for the first time in recent months after hitting an average of 6.81% for a 2 year fixed deal – a rate not seen since 2008.

Longer term mortgages are also available, offering up to 10 year fixed products with more attractive interest rates.

However the interest rates on offer are still substantially higher than the rates current homeowners will be used to, and with more than 400,000 people due to end their current fixed rate deal between July and September, even the more compelling shift in mortgage rates we’ve seen is still going to result in a substantial increase in monthly payments.

If we look at October 2021, we can see the real increase in mortgage rates. Back then, less than 2 years ago, an average rate for a 5 year deal was 2.55%, compared to now, where the average is 6.31%.

Based on a £200,000 mortgage, that means a real-world increase in monthly payments from £905 to £1,327 – requiring the homeowner to find an additional £422 per month.

On face value this is quite a worrying fact, however, there is some hope, though not necessarily for the immediate future.

Forecasts have now predicted that the Bank of England will not need to make as many increases to the base rate given the reduction in inflation, and this, combined with lenders’ awareness that without affordable mortgages the property market in the UK will struggle, we could see an ongoing stabilisation – and possible downward trend – in mortgage rates in the 3rd and 4th quarter of 2023, which in turn should see a housing market recovery follow.

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