Don’t bet in a big fall in house prices

Don’t bet in a big fall in house prices a report in the The Times say;- The final weeks of last year were marked by a succession of negative forecasts 

for the housing market. The consensus is for an 8 to 12 per cent drop in average prices alongside a double-digit decline in sales volumes in

2023. The trebling in mortgage rates over 2022, cost of living pressures, hit to real incomes and recession are all contributors to the gloomy outlook. Yet the outcome may be less cataclysmic than the headlines suggest.

First, the housing market is becoming more equity-driven, with less rellance on borrowers maximising leverage to buy homes. Half of those who bought homes in 2021 used cash or a mortgage less than half the value of the property.

This is a different situation from that in the run-up to 2007, when banks loosened credit conditions to support buyers - households bid up the cost of homes, driving a double-digit overvaluation in housing that exacerbated the price falls over the subsequent downturn. Average house prices tell by 12 per cent between 2007 and 2009 as mortgage availability dried up.

The second point is that the mortgage lending market has transformed thanks to regulations introduced after the global financial crisis. It is harder for borrowers to overextend themselves and the majority of households have had to prove to their bank that they can afford mortgage rates of 6.5 to 7 per cent, even though they might be paying 2 per cent or lower.

Mortgage rates for new business are already tumbling.

Variable-rate loans are about 4 per cent, while fixed rates are closer to 5 per cent, a range that is manageable for homebuyers. First-time buyers looking to purchase a home they rent outside southern England will find their monthly mortgage repayments to be less than the rental costs, even at 5 per cent rates. The challenge remains getting together a deposit that is large enough.

The impact of higher mortgage rates has been overestimated and will not hit the housing market in a uniform way. UK house prices could fall by up to 5 per cent, but the reductions will be concentrated in southeast England, where there is a large equity buffer to absorb price falls. Elsewhere, any price reductions are likely to be modest.

The final point is that the impact of the Covid pandemic is not yet over. Working from home is here to stay, enabling homebuyers to look more widely. The spike in retirement has also supported more home moves, often involving households with small or no mortgages, for whom higher borrowing costs have less of an impact on such decisions.

Cost of living pressures will come to the fore this year.

They will act as a catalyst for moves and support a million home sales in 2023, or maybe surprise us and drive sales volumes higher. These motivations to move are more about necessity than aspiration, which has

tended to support boom and bust in the housing market.

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conversation at thetimes.co.uk

While there's reason to be more optimistic about the market, it does come with a sting in the tail. House-price growth will be lower for longer as the market adjusts to higher mortgage rates and new generations remain less wealthy than their forebears.

At best house prices will track income growth over the coming years.

A more stable and less volatile market will ensure that we keep the investment flowing into building more homes and a steady flow of finance into the market to support movers.

Richard Donnell is executive director (research) at Zoopla