Plan Insurance Blog

Will Demand In The Housing Market Slow?

Extra funds saved during the pandemic and a stamp duty discount, as well as fundamental changes in how people live, accelerated buying and selling patterns from 2020 onwards. Some experts believe the housing market is due to crash, others believe it will slow but remain stable. So who is right?

New mortgages are declining, but house prices are mostly steady.

The number of new mortgages approved by lenders has fallen since January. This is the first sign that rising interest rates may reduce property demand.

House prices, however, rose for the twelfth month in a row in June. Steady demand and a shortage of homes on the market pushed average prices up by 1.8 per cent over the month, the biggest rise since pre-recession 2007.

In July, house prices fell slightly for the first time in a year. However, they are still 12% higher than they were last summer.

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Income isn’t meeting the rise in the cost of living and house prices.

Data from Nationwide, Britain’s biggest building society, shows that it has never been more challenging to afford a house than it is right now. Average house prices are equivalent to seven times the average annual income. Historically, prices have been closer to four and a half times income.

However, the accelerating cost of living is causing potential homeowners to fear making large purchases in an uncertain market. In addition, interest rates are making repayments more expensive, and long-term renting will be beginning to seem like a more pragmatic option for some potential purchasers.

Rightmove say that the market is slowing down – but demand is still steady

The property website projects that the annual rate of house price growth will almost halve by the end of this year. Commentators have also pointed out that prices have remained high in line with demand but aren’t being lowered as demand begins to quietly slow.

Rightmove says that demand hasn’t shown any sign of slowing just yet, but that if it comes it will improve the availability of homes. “The property market in the first half of 2022 cooled slightly from the frenetic pace of 2021, but remained healthy and ahead of 2019. Despite growing economic uncertainty towards the end of the half, there was little reduction in sales activity or demand.” A spokesman from Rightmove said.

It’s hard to tell if this is wishful thinking, sound analysis or a combination of both?

Can the housing market survive a bad recession?

Huw Pill, Chief Economist of the Bank of England, believes that the housing market will still flourish despite interest rates and the worst recession in 15 years. The BofE believes that we will begin a long recession this winter, which will contract the economy by 2.1%. This is a result of the rise in the cost of living, inflation and taxes.

The Bank of England has raised interest rates six times in the past nine months to contain inflation, which has largely been caused by the sharp rise in global oil and gas prices since the war in Ukraine. Pill has stated that tighter policy was designed to cool inflation and would also “work through different economic channels, including the housing market”.

Andrew Wishart, property economist at Capital Economics, isn’t optimistic. “Based on our forecasts that a mild recession is in store, we think house prices will fall by 5 per cent. But if the Bank of England’s bleak assessment that a deeper and more prolonged downturn is imminent proves correct, house prices will fall by more than that” the economist said.

Therefore any of our landlord insurance clients considering a property sale will need to think carefully about timing to maximise potential returns. On the flip rental demand should remain strong if less buyers committ to purchasers but rential income may struggle to keep pace with inflationary rises if fixed priced mortgages haven’t been secured for the mid to longer term.

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