Homeowners will struggle to make mortgage repayments and repossessions will rise next year as soaring interest rates and falling prices mark the end of the UK’s 13-year housing market boom, according to a sobering report from the Royal Institution of Chartered Surveyors (RICS).
The number of inquiries from potential homebuyers fell for a fifth month in a row in September, while sales fell to the lowest level since May 2020 when the housing market all but ground to a halt during the early stages of the coronavirus pandemic, it said.
The number of new instructions to sell has continued to fall – stock levels are at historic lows with estate agents on average listing just 34 homes on their books.
“Storm clouds are visible in the deterioration of near-term expectations for both pricing and sales,” said Simon Rubinsohn, chief economist at RICS. “The turmoil in mortgage markets in recent weeks has compounded the increasing level of economic uncertainty resulting from higher energy bills and the wider cost of living crisis, shifting the dial in the housing market.”
House prices have remained resilient due to the limited supply for sale, but the pace of growth is rapidly slowing with forecasts of at least a 10% price fall next year as surging interest rates heap pressure on household budgets.
On Wednesday, the average two-year fixed mortgage rate hit 6.46%, while the average five-year deal was 6.32%, the highest level since the financial crisis in 2008, according to Moneyfacts.co.uk.
The Bank of England’s financial policy committee on Wednesday said that the proportion of households struggling to pay their mortgages could rise to levels not seen since the 2008 financial crisis, if interest rates and living costs continue to climb. “It will be challenging for some households to manage the projected rises in the cost of essentials alongside higher interest rates,” it said.
However, policymakers said this was unlikely to result in a banking crisis, given that borrowers were in a “stronger position” than they were before the financial crisis. The Bank said this was partly due to caps on the amount that people could borrow for mortgages, compared with their incomes.
Soaring mortgage rates are pricing new buyers out of the market, while homeowners looking to remortgage are facing crippling increases in payments.
“For now mortgage arrears and possessions remain at historic lows but they are inevitably going to move upwards over the next year, as pressure on homeowners grow,” said Rubinsohn. “It is difficult not to envisage further pressure on the housing sector as the economy adjusts to higher interest rates and the tight labour market begins to reverse.”
Rising mortgage costs and the broader cost of living crisis will outweigh any potential benefit from the government’s move to cut stamp duty to prop up the housing market, said RICS.
On Wednesday, Barratt, Britain’s biggest housebuilder, said that the average number of weekly reservations by buyers of new homes slumped by a third year-on-year between 1 July and 9 October.
Last month, RICS said that the number of homes sold in the UK over the next year will record the biggest fall in at least a decade.
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About 1,000 mortgage deals were pulled from the market after Kwasi Kwarteng’s mini-budget on 23 September triggered a sell-off in financial markets and raised expectations for even higher interest rates. Many lenders have since returned with much more expensive deals.
“An era of double-digit price growth was already coming to an end but the mini-budget looks set to accelerate that process,” said Tom Bill, head of UK residential research at Knight Frank. “Sentiment has been damaged as lenders have struggled to fix rates, marking the end of a 13-year period of ultra-low borrowing costs. It’s a fairly safe bet that UK house prices have now peaked.”
The knock-on effect of a slowing of house sales has been a significant surge in demand in the rental market, alongside a fall in landlord instructions for new lettings.
“Near-term expectations point to a further strong growth in rental prices over the coming three months,” said RICS.
Increasing rental rates will help landlords when they come to remortgage their properties, but as many as 30% of those with buy-to-let loans are likely to fail their renewal test, according to a report by credit rating agency Moody’s on Wednesday.
In order to refinance, buy-to-let mortgage holders have to meet affordability criteria, based on a minimum interest coverage ratio (ICR), that soaring interest rates makes more difficult to meet.
“A 4% increase in interest rates by the end of 2023 would push 30% of buy-to-let loans below their minimum ICR requirement,” said Carmen Brunetti Llavona, analyst at Moody’s Investor Services.