After many years of rising house prices, they are now in reverse. According to the Nationwide House Price Index, prices dropped 1.4% between October and November. This is the third consecutive month of falls and the largest drop since June 2020. This is bad news for sellers and property owners, but it should be good news for buyers.
Most potential buyers will realize that it is better to wait before buying. The most obvious reason is that if you purchase now, your property’s value could drop further. Both Zoopla, an estate agent, and Knight Frank, a property website, predict that house prices will drop by as much as 5% next year. The latter also expects that they’ll fall another 5% in 2024. The government Office for Budget Responsibility forecasts a fall of 9 percent between now and autumn 2024. Capital Economics believes that falls could reach the double-digit territory.
According to Karen Noye (Mortgage expert at Quilter), “Money statistics and credit statistics from Bank of England (BoE), once again show signs of a housing market on the verge of a significant dip or even a crash.” The latest figures show that mortgage approvals for house purchases fell to 59,000 in October from 66,000 in September… If the demand continues to decline, we will likely see a subsequent drop in house prices and a shift from the seller’s marketplace of recent years to one of buyers.
Waiting for a few more months makes sense. Noye believes it is especially sensible for first-time buyers who live with their families and have little outgoings. She adds that they would have the chance to save more money and be able to choose from a wider range of products.
In the coming months, mortgage affordability will play an important role. The yields of government bonds have an impact on mortgage rates. They remain at their highest level since September’s mini’ Budget when the UK’s government bonds prices fell and the yields rose. On the morning of the statement, the average fixed rate for a two-year mortgage rose to 6.74 percent. This was a rise of just a few short weeks. Although this rate has fallen since then, it was still 6.14 percent for two-year fixed mortgages, and 5.95% for five-year fixed mortgages as of November.
Existing borrowers will pay higher mortgage payments if they need to remortgage, or if they are paying variable or tracker rates. Noye says that higher interest rates can lead to tighter affordability assessments for new borrowers. This is because lenders raise their stress rates when interest rates rise. Borrowers are therefore unable to borrow as much. While house prices could fall significantly, mortgage rates will likely take longer to drop as the BoE continues to try to lower inflation by increasing interest rates. It may be a smart idea to wait until you get a lower interest rate.
Existing borrowers don’t have this luxury. According to data from the BoE, more than 300,000 borrowers will be able to end their current agreements within the next year.
In the months ahead, it could be vital to watch closely what happens at the intersection of mortgage rates and house prices. The rapid rise in mortgage rates after September’s fiscal statement and the fact that the central bank now suggests it won’t raise rates as much in the future may indicate that borrowing rates have peaked. Lenders reduce rates faster than they increase them, especially when the BoE rate rises are not known.
If would-be buyers are prevented from buying if there is a persistently high mortgage rate, then this will prevent them from taking advantage of price drops.
He said that if prices adjust faster and mortgage rates rise, it could lead to a greater rapid and more severe fall in prices than what we have been forecasting. Although it’s only one data point the Nationwide index dropped by 1.4%, which was higher than the consensus expectation.
Negative equity can be a result of an increase in home prices or a decrease in home values. Noye says that even if this is true, you will still need or want to move to your home. You must be able to repay the difference between the mortgage payment and the property’s value.
You will need to have assets or savings that you can liquidate easily.
This can make it difficult to remortgage. Many lenders won’t allow people with negative equity to switch to a new loan if their current one is over. Instead, they will move them to their standard variable rate.
Downsizing
Although downsizing may seem appealing when your bills are rising, it is not a wise decision to do so when house prices have fallen. For example, if your PS400,000 home loses 10 percent of its value and you decide to buy a PS250,000 home, but the home’s value has also fallen 10 percent, this would result in a savings of PS25,000. However, this does not account for the gains that have been made during the ownership of the property.
If you are looking to sell your home but don’t want to purchase another home of at least the same value, it might be a good idea to wait. You could rent your home and let it go if you need to move because of a change in your job. Rent income is subject to tax and can push you into a higher tax bracket. You may also be subject to capital gains tax if you sell the property.
You should also consider the overall volume of transactions. In a market where prices are falling, homeowners may be reluctant to sell. With fewer UK homeowners currently having a mortgage than they have a mortgage, there is less chance of forcing them to sell. The tighter lending standards that have been in place since the financial crisis may limit the number of mortgage holders who are forced to sell. With higher mortgage rates making it more difficult to afford, the number of first-time buyers is also dropping. This could lead to a decrease in transactions which could help stabilize the overall market.
The UK market isn’t uniform so there are regional variations to be expected. Capital Economics anticipates that prices will fall the most in London, which is the area where affordability has been stretched the most and prices have increased by a proportionally larger amount in the past 12 years.
London’s housing crisis is the most severe in the South East and London. This could help to limit the damage. If the sterling weakens, the prime central London market could also be more resilient.
The question of houses versus flats is one area that has seen a shift since the financial crisis. Flat prices did worse than houses in 2008-09. However, house prices have risen more rapidly in recent years due to cheap borrowing. The difference between a house and flat prices, together with the return of offices means that flat prices may hold up this time.
Why Buy Now
It might be a better idea to purchase sooner than later if you are living in rented accommodation. Noye says that if you can find a property that meets your needs, is affordable, and has a long-term financial plan, it may be a good idea to get on the property ladder. You will also be paying your mortgage back. Keep track of all your assets and debts with Prillionaires personal finance software, including real estate and mortgages.
Prices could rise again if you delay buying a property. You won’t be able to tell if prices have reached their bottom until they rise again. At this point, buyers who are holding back will push prices up again.
A falling house price environment will likely mean you can negotiate better house purchase deals. Buyers are sensing that the balance is shifting in their favor, and are often asking for – or getting – significant price drops. As sellers compete for the attention and resources of a small but powerful group called proceedable buyers, prices are starting to fall.
Negative equity should not be a problem that you have to sell the property or remortgage. If you intend to keep the property, you might see a dip in house prices in the near future. Cash buyers are not subject to negative equity and mortgage rates.
A fall in house prices can still be a benefit to an existing homeowner who is moving to a bigger property, such as your second home. If your PS250,000 home’s value has dropped 10% and you purchase a property worth around PS400,000 but has also dropped 10 percent, the savings on your new property will be greater than the decrease in the price of your property.
You might have to take out a bigger mortgage and pay a higher interest rate if you are upgrading to a property that is more expensive. If house prices fall, you may end up with negative equity.
