Energy Prices And The Property Market

Despite the biggest spike in property prices over the last twenty years at the end of August and early September, property prices in the UK are heading to a sharp dip. In October property prices fell by 0.9%. and the price declined from £268,282 to £272,259.

At the beginning of this year, the share of first-time buyers reached almost 30%. But now the prospective buyers and those who are not in a good position financially are going to be hit the hardest by soaring inflation and rising interest rates. The new-buyer inquiries even reached the lowest level since the beginning of 2020.

The Price Cap came into effect as of October 1, 2022, and that means that an average household will typically spend £2,500 on utility bills for an entire year regardless of the price cap level. On the surface, it may seem that it can cushion the blow of the recession looming on the horizon. But most experts agree that it won't remedy the situation entirely.

With the inflation rate at 11%-12% in October, the price cap might support real incomes and slightly improve the inflationary outlook. However, the banks will continue hiking the states making mortgages more expensive and less affordable.

What are the consequences?

First, the soaring energy bills will result in reduced affordability. The income and outgoings of the potential buyer are considered when lenders calculate the amount he or she can borrow. Some of the lenders consider other typical costs. And those other ‘typical’ costs, aka energy bills, have increased dramatically, and they do not seem to stop growing. Thus, the lenders will eventually have to reassess what they are willing to lend. Those lenders who use statistics from ONS to calculate their affordability models will also face a reduction in the maximum loans due to energy prices. As a result, lenders would like to make sure that they aren’t going to lose their profit.

There is a strong correlation between tougher affordability and demand. The reduction of demand inevitably stems from the reduced affordability, since the buyers won’t be able to get the mortgage they need.

In the worst-case scenario, some homeowners might have to downsize or even sell their houses being unable to afford higher mortgage rates and soaring energy bills.

Those who are going to buy a new-built property are actually unable to complete their contacts because the developers are pushing the previous contacts to be exchanged. The buyers whose mortgages are expiring need to secure new deals but the rising interest rates, as well as construction delays, cause panic among buyers.

Though some experts attribute the sharp drop in prices to the former Chancellor's mini-Budget and the rising interest. All in all, in October property prices stopped growing and a drop of up to 20% within the next year and a half is still possible.