A A UK recession seems almost inevitable – but some estate agents have reported a spending spree and a flood of properties into the housing market as people try to move home before interest rates rise further to tame high inflation.
“Some buyers have made the decision to jump in now ahead of the next round of rate hikes and that has given the market a certain urgency in recent months,” said Lucian Cook, head of housing research at real estate broker Savills.
Knight Frank and Hunters are among real estate agents reporting other properties on the market. Gareth Williams, Managing Director at Hunters, says: “The last two weeks have seen a significant upswing and last week was the best listing week of the year for Hunters.”
“We’re at a crossroads,” says Andrew Groocock, a regional partner at Knight Frank. “Nothing has fallen off yet. August was our busiest August for new listings in London in 10 years and our busiest month since September 2020.”
But the economic situation looks threatening. Even with the £2,500 price cap freeze promised by Liz Truss this autumn, energy bills will be double what they were last year, inflation remains just under 10%, real wages are falling and interest rates are expected to hit 3% by the end of that Year. The Bank of England is expected to raise borrowing costs again this week by at least 50 basis points from 1.75% to fight inflation despite the weakening economic outlook. “For buyers, there’s a feeling, ‘I’m going to do it now because I can get a better mortgage rate and I can probably borrow a little more than I will in three, four or five months,'” says Groocock.
But people won’t pay a huge premium for real estate and will think twice before straining, experts say, as a recession looks likely in the fourth quarter.
Despite the spending spree in some areas of the housing market, there are numerous signs that it is boiling over. The official home price index showed annual growth of 15.5% in July, a 19-year high, but the comparison is inflated. Sales were unusually low in July 2021 because the stamp duty holidays, introduced to prop up the market during the pandemic, ended on June 30.
According to Halifax, Britain’s largest mortgage lender, the annual rate of house price growth fell to 11.5% in August. The country’s largest homebuilder, Barratt, provided further evidence of a slowdown in the housing market, saying the number of homes reserved each week through the end of August had fallen below last year’s levels and are now lower than pre-pandemic levels. partly because of “elevated macroeconomic uncertainty”.
Homebuilder stocks have slumped over the past year, with Persimmon, Barratt and Taylor Wimpey losing between 38% and 48% ahead of the end of the buyer’s assistance program next spring. However, many of the companies are optimistic, citing the UK’s chronic housing shortage and the improved energy efficiency of new homes, which they say will support demand.
Advisory firm Capital Economics is forecasting a 7% decline in house prices over the next two years and says demand is already falling sharply. With the exception of March and April 2020, when the pandemic forced the housing market to shut down, the balance of inquiries from new buyers in the Royal Institution of Chartered Surveyors’ survey in August fell to its lowest level since 2008.
With unemployment at 3.6%, the lowest in almost 50 years and not expected to rise until mid-2023 according to the Bank of England’s latest forecast, most experts are expecting the property market to slow rather than crash. Jeremy Leaf, a North London estate agent, says: “I’m expecting a slowdown. There are fewer inquiries and prices are already falling. It will be a more normal market, a return to what was pre-Covid.”
Savills is in the process of revising its forecast of a 1% fall in house prices next year, which could well be lowered, says Cook – “although not to the extent, from today’s perspective, as was the case during the downturns in the housing market at the beginning of the 1990s and 2008-09”. According to the Nationwide Building Society’s home price index, prices fell 19% over three and a half years in the early 1990s and a similar amount in 18 months during the credit crunch.
With three-quarters of borrowers on fixed-rate mortgages, and more and more loans fixed for five years (instead of two), they are in a better position to weather a rise in borrowing costs, Cook says. However, figures from UK Finance show that 1.8 million mortgage deals are due to close over the next year and will need to be refinanced at a time when interest rates are rising.
Renting is also becoming more expensive. Many renters have been forced to opt for smaller properties – one- and two-bedroom apartments – property firm Zoopla reported last week, while new students in Manchester and other cities including Bristol, Glasgow and Edinburgh are having to commute from neighboring towns due to a housing shortage at the University.
Rents rose to record levels in the summer. Zoopla found that the average rent across the country rose by £115 a month to £1,051 last year. Rent now accounts for more than a third of the typical income of a sole earner. Website Hometrack, which is part of Zoopla, believes rental growth is nearing its peak, trailing double digits at an annual rate of 12.3% for the country as a whole and at an “unsustainable” 17.8% in London decline during the pandemic.
Yasir Khan, 40, lives in an 8 square meter flat in Walthamstow, east London, crammed with a shower, toilet and cooker. When he lost his job in 2018, he was left homeless and lived in temporary shelter until Hackney council found him the apartment. The £811 rent comes from his Universal Credit. He has major depression and panic attacks and is afraid to go outside. At the same time, he feels “trapped” in the tiny space, which he says is “the size of a prison cell.”
“I’m in big trouble because I’m on welfare and it’s pretty much impossible to find anything that fits me,” he says. He’s looking for a larger studio but there aren’t many properties in London he can afford, at £1,100 a month. He moved to London to be near his nine-year-old daughter, who lives with his ex-wife.
“Four million people rent on the private rental market. It’s going to be a very worrying time for them over the next year,” says Henry Pryor, a buyer. “There is a lot of uncertainty at the moment, people are worried about jobs. Mortgage lenders care more about the self-employed, landlords want bigger deposits – this is what it looks like when the housing market is booming.”