Is the UK housing market cooling?

Despite frigid weather and a heavy snowfall in Salisbury in south-west England this week, estate agent Chris Husson-Martin is at work by 7am. “Nothing stops,” he said, adding that despite the snow “we only had one cancellation”.

Like other property agents across the country, he is working overtime to repair damage to the housing market inflicted by Liz Truss’s September “mini” Budget, which sparked a sudden jump in mortgage rates to about 6 per cent that Husson-Martin said “very much freaked people out”. 

“We had deals that fell out of bed because people couldn’t afford them anymore,” he recalled. But after mortgage rates steadied at about 4 per cent some of the failed purchases have started to come good — albeit at lower prices. “We re-agreed two of them [with] the original buyers,” he said.

The discounts mark a major shift after more than two years of superheated house prices encouraged by very low borrowing costs and government incentives that have now come to an end.

The price reductions are among a number of indicators that the UK housing market is cooling. In January, mortgage approvals dropped to their lowest levels since May 2020, when the market was largely shut because of a Covid-19 lockdown. Excluding the pandemic, approvals were at their lowest since 2009.

Separate data published this month by mortgage provider Nationwide showed that average house prices declined to £257,400 in February, from a peak of £273,800 in August 2022. The latest available land registry data shows they dropped by 0.4 per cent between November and December.

Line chart of Average house price, £ '000 showing UK house prices have cooled since last year's 'mini' budget

“I suspect that buyers’ expectations of what a house is worth are resetting,” said Tomasz Wieladek, chief European economist at asset manager T Rowe Price. He expects house prices to decline between 10 and 15 per cent from their peak and predicts that the market will see “a war of attrition,” between buyers and sellers that “buyers will eventually win”.

An influential survey by the Royal Institution of Chartered Surveyors published this week revealed that 60-70 per cent of properties sold for less than their asking price last month. It also found that higher borrowing costs and inflation are squeezing budgets and dampening demand, which has been declining for 10 consecutive months.

The average discount to asking price across the UK in February was 4.5 per cent, according to Zoopla, the property portal. But agents say the market is fragmented, with discounts available for some types of housing, such as flats, but very little supply of in-demand properties, like family homes. The RICS survey reported the stock of residential properties for sale is close to its lowest level since records began in 1978.

“It is a real scarcity issue that is keeping prices pretty strong for family homes,” said Sophie Sharman, head of sales at Hamptons in Balham, south London. She added that buyers looking for a home costing about £1.5mn in her area last year “would be seeing 20 houses on a Saturday” but now they are “maybe seeing two or three viable options”. 

Agents say the shortage of residential properties may reflect potential sellers waiting for a more buoyant market. “Most people don’t need to move or need to sell. As we found in 2008, rather than accept a low price they just . . . try again in a year’s time,” said Matthew Leonard, director at Winkworth in Bath. “It is a desperate shortage of property and some very, very frustrated buyers.” 

However, some good deals can be found in less-favoured parts of the market, particularly flats, where first-time buyers are a key part of demand. “First time buyers fuel that market. They are just so nervous,” said Sharman. “They are not getting the mortgage deal that they want, so they are almost asking the seller to make up the difference with the price.” 

Line chart of First time buyers, % of take-home pay showing UK mortgage payments have increased

These buyers are entering a market with historically high house prices, which boomed during the pandemic. Despite the recent decline, the average house price is still £41,000 higher than in February 2020, just before the first Covid-19 restrictions were imposed, according to Nationwide. By comparison, prices grew by only £10,000 in the three years to February 2020.

As a result Nationwide found that first-time buyers’ mortgage payments have risen to 39 per cent of take-home pay, the highest proportion since 2008.

Some analysts predict buyers will adjust to those higher borrowing costs and demand will return.

“While there are a lot of headlines about prices coming down, they are basically just coming back to reality after years of a Covid crazy market,” said Leonard.

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