Three charts that tell all about UK property
Welcome back, hope you had a good weekend. We’re talking about the UK housing market again today. I’ll warn you in advance, it’s a bit of a chart-fest — there’s a whole three of them. But hopefully you’ll find them useful.
The story so far: UK house prices have fallen a little — about 5% in nominal terms, significantly more in real (after inflation) terms — since peaking in summer last year (I’m using Nationwide data).
Given the extraordinary rise in interest rates over that period, it may seem surprising (and, for first-time buyers, frustrating) that prices have apparently remained so resilient.
However, there has been a crash in the market. Not in prices, but in transaction levels. And last month, that continued, as the latest Bank of England figures demonstrate.
The number of mortgage approvals for new home purchase dropped to just above 43,300 in September. That was down from just under 45,500 in August, and about a third lower than the same time last year.
As the chart below shows, this is not a “normal” market by any stretch of the imagination. In the period between the end of the last housing bust (around 2013) and the start of the pandemic in early 2020, mortgage approvals were running between 60,000 and 70,000 a month. So this is a seriously becalmed market.
For a different perspective on just how quiet this is, the chart below is even more striking. It shows that on a net basis, as a nation of homeowners, we actually paid more towards our mortgages than we took out in new borrowing last month. That’s highly unusual, as the chart below shows.
Even in the depths of the 2008 bust, net mortgage lending very rarely went negative and never to the extent we’ve seen this year. No wonder your local estate agent is looking stressed. (If you’re wondering what the spike up and down in 2021 was, that was a stamp duty holiday — so everyone got their deals in at the last minute, distorting the figures).
It’s All About Interest Rates
What’s going on? If you hadn’t already guessed, you’ll find it’s pretty clear when you look at this final chart. This shows that the average interest rate charged for a new mortgage reached just over 5% last month, while the average rate on outstanding debt climbed to 3.14%. Both are now at their highest levels since prior to the 2008 crash.
Now, I would expect that white line to start topping out around about now. You can get new mortgage loans at around or below 5% pretty widely today, depending on the product you opt for and the size of deposit you have. But that blue line is going to keep rising for a while yet as more and more people have to remortgage.
Note also that remortgage levels are currently near record lows — September saw the lowest number of remortgages since January 1999. However, this only captures remortgaging done with a different lender. If you stick with your current lender, the remortgage is not recorded.
Why are more people sticking with their current lenders rather than shopping around? The obvious reason is because that way they avoid being subject to new affordability checks, which in turn suggests that a surprising number of people are worried that they’d fail said checks. That does not necessarily bode well for financial resilience.
Anyway, getting back to that white line — you can see that even if it were to drop back to 4%, say, it would still be well above the average for the past decade or more. That means the pressure on the housing market and on prices will continue.
When mortgage rates rise, the amount of money a potential buyer can borrow at a given monthly mortgage payment goes down. In turn, that means the buyer’s overall budget — the amount he or she can offer to pay for a house — goes down. Sellers still want the peak price for their properties, but buyers can no longer afford to pay those peak prices.
At that point, a buyer can do one of three things. You can give up looking and decide to rent or stay in your current home. You can drop your expectations — go for a two-bedroom flat rather than a three-bedroom house, say. Or you can start making “cheeky” offers in the hope that the lack of competition will persuade a seller to drop their price.
This is exactly what’s happening right now. According to property portal Zoopla, the areas and sectors being hit hardest are those where properties are more expensive — so bigger family homes versus flats, and homes near London versus those in less expensive areas.
Meanwhile, sellers are adjusting prices slowly and reluctantly. In the absence of wider economic distress, that’s exactly what you’d expect to happen. But in the longer run, a mixture of estate agent desperation and a widening acceptance of reality is likely to keep them grinding lower. That’s assuming we don’t run into serious economic turmoil in the meantime.
In short — the housing market remains in deep freeze, but the drip, drip of rising interest rates and gently falling prices will, I suspect, result in the correction continuing, regardless of what the Bank of England does with interest rates this week.
Source : Bloomberg