Experts react to weakening demand caused by high inflation and interest rates
Housing market activity continued to weaken last month with house prices dropping across the country for the first time in more than two years, according to the latest RICS survey.
The Residential Market Survey, which takes in the views of chartered surveyors in the residential sales and lettings sector, reported that the net balance for house prices fell -2% in October, down from +30% in September, effectively ending a run of 28 months of house price growth.
In addition, buyer enquiries and agreed sales also fell.
The survey pointed out that respondents in areas such as East Anglia and the Southeast of England were reporting “some pull-back” in prices (posting net balances of -31% and -16% respectively).
By contrast, respondents in Northern Ireland and Scotland continued to report “a reasonably firm upward trend”, although the pace of growth was slower than earlier in the year.
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Meanwhile, buyer enquiries fell for the sixth successive month, weakening further to -55% in October, compared with -36% in September.
The survey also found that feedback on buyer demand was negative across all parts of the country for the second month running.
On the flip side, the latest survey showed that demand “remains firm” across the lettings market, with tenant enquiries still rising within all parts of the UK.
The latest survey comes the same week the Halifax reported the biggest drop in property prices since February 2021 in its monthly HPI, with average house prices falling by 0.4% in October.
In addition, a report by real estate services company, Savills, last week predicted that house prices would drop by 10% next year.
Shaun McDonnell, economist at investment bank Goodbody, said the UK housing market was showing signs of a more “significant slowdown” as prevailing economic headwinds outweighed the supply and demand imbalance that had driven “gravity-defying growth” over the last two years.
He said: “This is the sixth month in a row of slowing house price growth and the first-time prices have fallen in the RICS series since June 2020, evidencing we have entered a new era in the housing market.
“The changing dynamics are being driven by demand destruction, exacerbated by the sharp rise in mortgage rates over the past six weeks which has led to buyer enquiries declining by over 50%, a level we’ve not seen since the Global Financial Crisis.
“The economic situation has also seen supply dwindle, albeit at a much slower pace than demand, with available stock also falling for the sixth month in a row. Incredibly, this is the twenty-first month in the last two years that new instructions have fallen, highlighting the extent to which supply has been stretched to extremes.”
He said next week’s Autumn Statement would be crucial, as a decision would be made on whether flagship policies like the Stamp Duty cut would be retained and provide hope to homeowners looking to preserve property values.
Richard Rowntree, managing director of mortgages at Paragon Bank, said the data confirmed the lingering uncertainty surrounding the UK economy, despite many of the measures outlined in the former Chancellor’s mini budget being reversed.
“This has contributed to mortgage rates remaining higher than those borrowers have become accustomed to over the past decade and when viewed against a backdrop of growing regulatory obligations we see how the appeal of buy-to-let investing further diminishes. This is reflected by continued low levels of landlord instructions reported by survey respondents in recent months,” he said.
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However, he noted that some stability had returned to the market as lenders had started to lower rates (the Nationwide Building Society said it would cut mortgage rates by up to 0.70% from November 11, while Keystone Property Finance announced a similar move on its entire variable rate range, along with MPowered Mortgages, which cut its fixed rate mortgages by up to 76 basis points).
Rowntree added: “I anticipate a return to purchase activity amongst the landlords who have built up substantial equity in their portfolios as a result of increases in property prices, with investors seeking to meet the continued strong demand for privately rented homes.”
Chief commercial and growth officer at Smoove, Simon McCulloch, said the survey findings indicated that home buyers were demonstrating “greater caution”.
He said: “The Bank of England’s interest rate hikes driving up mortgage repayments and inflation squeezing buyers’ budgets means new buyer enquiries are cooling. While markets have calmed since the government’s mini budget and the arrival of a new prime minister, mortgage rates are still very high compared to what they were only a few months ago, and this is likely here to stay.”
However, McCulloch added that there could be some relief ahead, noting that the Bank of England had indicated that interest rates would likely not rise much higher than their current level, suggesting they were nearing the peak rate.
Emma Cox, MD of real estate at Shawbrook, pointed out that high inflation and a surge in interest rates, in addition to political and economic uncertainty, had created “a tough backdrop” for the property market and dented confidence.
“Looking ahead, buyers, sellers and tenants will be looking for more action to alleviate cost of living concerns,” she said. “All eyes will therefore be on this month’s autumn budget - with hopes that further clarity is provided from the government, not only on how it will address current issues, but additionally longer-term supply concerns.”
