What You Need to Know About the Property Market in the Cost-of-Living Crisis
The political turmoil over the past few weeks, together with the longer-term impact of Brexit, the Covid-19 pandemic and the war in Ukraine have all affected economies across the world. As prices of food and energy costs have spiralled and wages struggle to keep up with inflation, the “cost of living crisis” has become a household phrase as people start to feel the effect in their pockets.
The UK property market has proven to be quite resilient to the downturn in the economy. Although house sales in September 2022 were 40% lower than at the same time in 2021, when the end of the Covid-19 stamp duty holiday provided a temporary spike in completions, they have remained at similar levels for a number of months with the overall number of completions still higher than before the Covid-19 pandemic. However, this may be set to change.
Over the past few months, as inflation has increased and the Bank of England started a series of interest rate rises, many had predicted that property prices would fall. However, it was the reaction to the mini-budget delivered by Kwasi Kwarteng in September which may yet have the greatest effect. Markets which were fearful that the government had committed to unfunded tax cuts and support measures, caused gilt yields to rise which panicked lenders who pulled thousands of mortgage products overnight. The sharp increase in costs of borrowing together with higher energy prices and the cost-of-living crisis has meant that prospective buyers can no longer afford the properties they were saving towards and analysts have predicted that the resulting reduction in demand could cause the property price bubble to finally burst.
The initial market reaction to the Sunak government has been positive. However, as a result of the general financial instability and with lenders waiting for clarity on the government’s fiscal plans, both lenders and buyers are being cautious. Aldermore bank reports that 1 in 3 would-be homeowners have put their property purchases on hold, anticipating delays of around 20 months.
It is expected that interest rates will rise further and although the general rule is that higher interest rates cause rents to fall, indications are that landlords are passing these costs onto their tenants and some renters have reported being hit with hikes of 30% to 40%. The perfect storm of higher rents together with increased living and borrowing costs will push property ownership even further out of reach.
Renters who are still holding out in hopes of a property crash may still be unable to get onto the property ladder. After the 2008 global financial crisis when Britain’s housing market experienced a downturn, banks tightened their lending criteria making it difficult for first-time buyers to meet these and so it was not first-time buyers who benefitted from lower house prices but investors.
Ultimately, house prices are dependent on a variety of factors, including the supply and demand of housing, and the effects are often slow to set in, making it difficult to predict which way prices will go. Some homebuyers who already have a mortgage in place may be pressing ahead with their purchase while others may choose to sit it out for a while to see what happens to mortgage rates and house prices in the coming months and it is likely that the full effect will only be known at the beginning of 2023 when figures for the final quarter of 2022 are released.
If you would like to discuss any aspect of this article, or for any other business or accounting advice, please email Yedidya Zaiden at yedidya.zaiden@raffingers.co.uk or click here to get in touch.