7th September 2022

Welcome to our latest residential research update, where we share our insights into the data and trends currently shaping the UK property market.

With the news dominated by cost of living pressures and the prospect of further increases in interest rates, it is surprising that headline statistics for the UK housing market remain so strong.

Still in double digit territory

Last week, Nationwide reported a 0.8% seasonally adjusted increase in mainstream house prices in August leaving annual house price growth in double digit territory (though only just).

And a few days before that, the Bank of England put mortgage approvals for house purchases at 63,770 for the month of July, slightly ahead of June and still closely aligned with the pre-pandemic average.

But are things starting to cool?

Predictably, however, there are signs that some of the heat is coming out of the market. Both Zoopla and the RICS are reporting a softening in buyer demand?with the former suggesting that the shortage of stock available to buy is also beginning to ease.

Meanwhile, data from TwentyCi shows that agreed sales were 14% above pre-pandemic levels in the first 7 months of the year and 5% above that same benchmark in August with the strongest levels of activity continuing to be seen in the highest price bands.

With the Monetary Policy Committee (MPC) having voted 8:1 in favour of increasing the bank base rate to 1.75% at the beginning of August and the Bank of England raising its expectations for inflation to 13% in 2022, the expectation is for a further 0.50% increase in the cost of debt this month and further modest increases at subsequent meetings until the risk of embedded inflation has passed.

While most economic forecasters are expecting rates to then be reduced back towards 2% in late 2023 and through 2024, this does raise the question of how insulated the housing market is against such a spike in costs of debt.

What does that mean for buyer commitment?

The results of our most recent client survey indicate that this economic backdrop has impacted on short term commitment to buy.

Whereas, in April a positive net balance of 15% of respondents showed an increased commitment to move over the next 6 months, at the end of August that reading had fallen to zero and dropped into negative territory (-10%) among upsizers.

Furthermore, 29% of prospective buyers said that their budget had decreased because of recent economic pressures.

More encouragingly, that commitment to move remained much stronger over the next 2 years at +15%.

Mitigating factors

The full effect of higher interest rates on buyers will have been mitigated by the relaxation of mortgage regulation that we saw in early August.

Similarly, Government plans to cap consumer’s energy costs, which are expected to be announced tomorrow, will moderate the pressure on household incomes. And it could further soften the impact if it serves to reduce inflation expectations, allowing the Bank of England to take a more doveish approach to future rate rises.

Meanwhile, the extent to which buyers either;

• ?hedged against interest rate rises (by adopting longer term fixed rate mortgages)
• or had their affordability stress tested under the now historical mortgage regulations

should both serve to minimise distress in the market.

This said, we do expect to see more sobriety in the market over the autumn, meaning there is little doubt that setting an ambitious asking price has become a far riskier strategy for those looking to sell.