What's next for the Housing Market?

The UK property market had been on the rise till the end of September. Supply and demand were pushing the property market prices up. On the other hand, low interest rates fuelled people's application for mortgages, making them more affordable. In fact, September 2022 marked the biggest spike in property prices over the last twenty years. It had not even been affected by the end of the Stamp duty holiday, which was expanded till the end of September 2021.

However, the speech delivered by Chancellor Kwasi Kwarteng on 23rd September 2022, threw the UK housing market into turmoil. In fact, he declared that the Government is going to implement the biggest package of tax cuts. The Chancellor’s announcement is very much likely to bring the housing market to a halt and prevent people from buying or selling houses in the immediate future.

What to expect?

As a result, on 26th October 2022 the UK pound value dropped to a historical minimum, Gilts – the British Government bonds rose significantly from 3.5% to more than 4.4% putting economic growth in jeopardy. That huge move in financial security and stability resulted in the fact that many lenders suspended offering mortgages and those who applied recently or were about to apply for a mortgage are going to get it anytime soon.

The temporary suspension might turn into an indefinite pause in the lending market since companies are not giving any specific time when they are going to resume their work. It could also result in the imminent stagnation of the housing market. In the UK up to one third of homeowners and buyers rely on mortgages. Being unable to get a loan those potential homeowners will be eventually cut off from the market.

The biggest lending companies are withdrawing from the market. Those who haven’t will reassess their capacity and will have pulled out by the end of next week. Those still working are pulling out their cheapest deals and repricing mortgage products. Most mortgages were two-year-fixed or five-year-fixed rate mortgage deals, which are not available at the moment. What’s more, you will hardly find any mortgage deals under 5%.

The mortgage rates had already been approaching the 5% level even prior to the Chancellor's announcement. Given these circumstances, housing prices are going to reach the financial crisis levels, but if the base rates keep getting higher, the prices could drop even more. A mortgage interest rate of about 6.6% would reduce the affordability to the pre-crisis level. No matter how strange it might sound, it might have a positive outcome as well. Poor affordability will eventually make the housing prices soften because people will have less money to spend.

Besides that, the British banks are in for the annual stress test which has been held since 2013. This year it has been postponed due to the war in Ukraine, which disrupted the financial sector in Europe. The dramatic drop in housing prices up to 30%, 17% inflation, 6% mortgage interest rates, doubled unemployment, and deep economic recession – are the key elements in this year’s bank stress test scenario. The results are going to be revealed in 2023. Though the Bank of England insists that this should by no means be regarded as a forecast, who knows?

We will see.