Report notes signs of easing in affordability pressures
UK house prices kicked off the year with a 0.7% monthly increase in January, improving annual house price growth from -1.8% in December 2023 to -0.2% this month.
The latest Nationwide House Price Index showed the annual rate of house price growth making its strongest outturn since January last year.
“There have been some encouraging signs for potential buyers recently with mortgage rates continuing to trend down,” Robert Gardner, chief economist at Nationwide Building Society, commented. “This follows a shift in view among investors around the future path of bank rate, with investors becoming more optimistic that the Bank of England will lower rates in the years ahead.
“These shifts are important as this led to a decline in the longer-term interest rates (swap rates) that underpin mortgage pricing around the turn of the year. However, the partial reversal in recent weeks in response to stronger than expected inflation and activity data cautions that the interest rate outlook remains highly uncertain.”
Alan Davison, director of customer sales at Together, said that house prices rose as falling mortgage rates had provided a boost to buyer demand at the start of the year.
“While sellers may still be getting largely cut-back offers on listings, market for first-time buyers and homemovers is certainly picking up momentum,” he added. “There are also opportunities in the residential property market for buy-to-let investors. That said, there are still lingering challenges property professionals will need to contend with for much of this year.”
Karen Noye, mortgage expert at wealth management firm Quilter, noted that the precarious nature of the economy had left many prospective buyers in ‘wait and see’ mode, reluctant to buy a new home in the hopes of securing lower rates further down the line.
“But we are now seeing tentative signs that people are making a return to the market,” she said. “Should mortgage rates continue to fall, then more may be lured back to the market sooner, which would help to buoy prices further.”
Gardner pointed out that while a rapid resurgence in activity or house prices this year seems improbable, the outlook appears somewhat more positive, with the latest RICS survey suggesting a halt in the decline of new buyer enquiries, coupled with tentative indications of increased property listings.
“How mortgage rates evolve will be crucial, as affordability pressures were the key factor holding back housing market activity in 2023,” he said. “Indeed, at the end of 2023, a borrower earning the average UK income and buying a typical first-time buyer property with a 20% deposit had a monthly mortgage payment equivalent to 38% of take-home pay – well above the long run average of 30%.
“If average mortgage rates were to trend down to 4%, this would ease the mortgage payments burden to 34% of take-home pay (assuming house prices and earnings are unchanged). However, other things equal, mortgage rates of 3% (still well above the lows seen in the wake of the pandemic) would be needed to bring this measure of affordability back towards its long run average.”
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