UK Mortgage rate rises ‘to push house prices down 8%’

House prices will fall by 4.5 per cent next year because of higher mortgage rates, the Office for Budget Responsiblity said yesterday. It believes that by the end of next year they will have  fallen by 7.6 per cent from their peak, in the fourth quarter of last year.

It will take the price of an average UK home to a low of £266,000. “We then expect house prices to recover slowly, reaching their late 2022 peak levels in the second half of 2027 and rising to 6.4 per cent above this level by the end of the forecast [2029],” it said.

“The outlook for house prices is particularly sensitive to changes in interest rates and household income growth.” The forecast is an improvement on the OBR’s predictions in March by 2.4 percentage points. Broken down by year, the watchdog said that prices would do better than expected this year, with a rise of 0.9 per cent, but then dip again by 4.7 per cent in 2024. Rocketing mortgage rates after the September 2022 mini-budget had led to transactions falling to their lowest levels since the middle of the pandemic in the second quarter of this year.

The Royal Institution of Chartered Surveyors reported that new buyer inquiries were at their lowest level outside of the pandemic period since 2008. The OBR said transactions would fall by 6.9 per cent in 2024, a 1.9 percentage point steeper decline than its March forecast, as mortgage rates remained stubbornly high and deterred buyers.

Average mortgage rates are predicted to rise from 2 per cent in 2021 to peak at 5 per cent in 2027. That is 0.8 percentage points higher than the forecast in March and 2.2 percentage points above the average for the last decade.

The OBR’s figures predict the average rate that will be being paid by all borrowers with mortgages in 2027. It does not indicated the average fixedrate deal that banks will be offering for new borrowers in 2027: this will be far lower than 5 per cent, because banks offer deals based on what they think rates might be in the future.

In its report the OBR said that, because nearly nine in ten borrowers are on fixed-rate deals, it takes longer than it used to for higher interest rates to filter through to everyone’s mortgages, which means that over half of the impact from two years of interest rate rises has yet to be felt.

Aneisha Beveridge, the head of research at Hamptons, said the news was not as bleak as feared because new deals offered by banks, particularly five-year offers looking ahead as far as 2029, were now starting to fall. She said: “It looks increasingly likely that mortgage rates peaked in July and, should rate falls accelerate, there may be a time where some households will find it beneficial to pay an early repayment charge on their existing deal and move on to a lower rate.” Lucian Cook, director of residential research at Savills, said: “Even for those homeowners who have faced a sharp rise in mortgage costs, the impact has, in the main, been uncomfortable as opposed to wholly unmanageable.”

While rates advertised by lenders have come down over the last few months, the cheapest deals offered by banks still only start from 4.5 per cent. Jeremy Hunt said that the government’s mortgage guarantee scheme, which supports lenders providing 95 per cent loan-to-value mortgages, would continue to June 2025. It had been due to close at the end of this year. 

Source: The Times

US: Owning a Home Has Become Pricey, Fast.

The gap between median rents and what a new homeowner would pay for a property at today’s mortgage rates has never been wider, at least as far back as we have the data.

That fact will have large implications for the mortgage and housing markets. Since the end of 2019, the consumer price index is up 19%.

Meanwhile, rents have gone up by 31%, from $1,562 to $2,047, while home prices have increased by 41%—from $244,918 to $348,539.

And this doesn’t consider the impact of interest rates, which have increased from 3.74% at the end of 2019 to 7.5% in the latest reading.

This means, assuming a 5% down payment, that the mortgage payments on a mid tier home have jumped from $1,076 to $2,315, an increase of 115%.

Looked at differently, in 2019, most mortgage payments were considerably less than the rental payments; now they are much more. These numbers are oversimplified, as they ignore many costs that homeowners will need to pay. It also ignores local variations.

However, the basic point remains: At today’s high interest rates, owning a home has gotten much more expensive relative to renting. Why would anyone buy a home in this environment? The relationship between local prices and rents may be different than on the national level, and most will still find the stability of owning a home attractive. Mortgage payments don’t go up, and can go down if the borrower refinances.

However, fewer renters will find these arguments as compelling in the face of large increases in their monthly housing costs. This has several implications for the market.

First, most homeowners aren’t experiencing any impact on their monthly payment from this rise in rates, as many either purchased new homes during the pandemic or refinanced their homes under the period of low interest rates.

Approximately 60% of borrowers pay a mortgage rate of less than 4%, and 80% of borrowers pay less than 5%.

Thus, for most homeowners, either renting or buying a new home would represent a large cost increase. Their best bet is simply to stay put. This creates a large “lock-in effect,” limiting homeowners’ mobility.

As rates rose in 2022 and the first half of 2023, the decrease in the supply of homes on the market was offset by a decrease in demand, as fewer renters could qualify for a mortgage.

Mortgage rates rose from the high sixes to the mid sevens over the past four months. But since most homeowners’ rates were below 6% already, this recent increase doesn’t have much impact on the lock-in rate. But it does change the economics for renters. Fewer can qualify for a mortgage.

We would expect that the demand from renters to purchase homes will dampen, even as the supply of homes remains relatively constant. This suggests that, in the short run, we could see some moderation in the home price increases we have experienced over the past few months, or even a modest decline. We would also expect to see houses stay on the market longer and months’ supply continue to increase due to lower demand.

The industry hasn’t yet adjusted to this new environment. Market activity was already much reduced, and with the further increase in rates working its way through the system, the bias will be toward still less market activity.

Existing-home sales are down from a peak of 6.56 million units in October 2020 to 3.96 million units in September 2023, a 40% decline. Meanwhile, the employment of agents and brokers in the real estate industry has actually increased since late 2020.

Similarly, mortgage origination is down from $4.5 trillion in 2021 to an estimated $1.6 trillion in 2023. Meanwhile, employment in the mortgage banking industry is down by 17%. Indeed, employment in these industries hasn’t adjusted to the new levels of activity, and it must do so.

Homeowners will have to reevaluate how they think about home improvements and how to finance them. For years, with the secular decline in interest rates, homeowners would move for more space or a nicer home.

When homeowners have a below-market mortgage rate, they are likely to stay in their home for longer and are more apt to need to make major improvements. But financing is now more expensive. Cash-out refinances require the entire mortgage to be refinanced at the now much higher rate, and home equity lines of credit generally require pristine credit scores.

Second liens, in which the borrower leaves the first mortgage in place and takes out a second mortgage to cover the costs of the renovation, haven’t been a part of the market since the 2008-09 financial crisis.

They will make a comeback. What does all this mean? Fewer renters will seek to become homeowners, decreasing the demand for housing. Supply is already down, as so many borrowers are locked into a low-rate mortgage.

With demand falling and supply constant, the pressure that has raised housing prices and shortened listing times over the past four years will likely ease. It will certainly result in fewer real estate sales and mortgage originations, requiring downsizing of those industries.

It will increase the demand for home renovations, and institutionalize the comeback of the second-lien market. There will be many adjustments ahead.

Source: Barrons

UK housing market is past ‘peak pain’ with upturn due in 2025

Britain’s housing market is past “peak pain”, and price s look likely to bottom out by next summer, according to the estate agency Savills. The average UK house price is projected to fall by 3% in 2024, after a 4% drop this year, the upmarket estate agent and property advisory firm said.

Prices held up slightly better than expected in 2023, as mortgage markets settled over spring and autumn , after the chaos unleashed by Liz Truss’s mini-budget just over a year ago. Property values are estimated to be down 7% since the autumn of last year to the end of 2023.

Savills expects the Bank of England to start cutting interest rates in the second half of 2024, reducing its base rate to 4.75% by the end of that year, from 5.25% now. The property company forecasts rates will fall to 1.75% in 2027.

The central bank has hinted that interest rates are likely to stay high for a prolonged period to tackle infl ation. Savills is forecasting a return to house price growth of 3.5% in 2025, with 5% in 2026, 6.5% in 2027 and slowing again to 5% in 2028.

The forecasts came as the mortgage lender Halifax said UK house prices rose last month in the face of a shortage of homes on the market after a run of six monthly falls . The average price rose to £281,974 in October, up by 1.1% from September, an increase of almost £3,000 and the first time prices have gone up since March.

Compared with October last year, prices fell by 3.2%, less than the annual decline of 4.5% in September.

Lucian Cook, Savills head of residential research, said: “ The first cut to rates still looks to be some way off . This means continued affordability pressures are likely to result in further modest house price falls over the first half of 2024, resulting in a peak to trough [fall] in the order of 10%.

“ We expect growth to accelerate as affordability pressures ease, with the strongest growth forecast for 2027 when rates reach their long-term neutral level. ” However, reflecting fewer deals with mortgaged buyers, in particular buy-to-let investors, overall property transactions are expected to end this year 20% down on 2022 at just over 1m, and stay at this level next year. The market is in the late stages of a typical cycle, Savills said.

That suggests slightly greater house prices falls in London and the south-east next year, and the strongest overall price growth in Wales and north-east England over the next five years, with London leading growth from 2028 . Prime central London properties (the top 5%-10%), are the only market segment projected to avoid falls in 2024.

Source: The Guardian