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‘Storm clouds gather’ over housing market as mortgage rates rise

Mortgage market turmoil in recent weeks has compounded increasing economic uncertainty, the Royal Institution of Chartered Surveyors said.

12 October 2022

“Storm clouds are visible” in the housing market, according to surveyors, with surging mortgage rates expected to push house prices downwards in the year ahead.

The market lost momentum in September, with new buyer inquiries falling for the fifth month in a row, the Royal Institution of Chartered Surveyors (Rics) said.

A limited supply of properties for sale is still supporting modest price rises, but this looks set to end as the pace of growth slows markedly, the latest report from Rics indicated.

The outlook for interest rates and uncertainty over the wider economy are taking their toll, with the impact of rising mortgage rates expected to outweigh the boost that buyers could get from stamp duty cuts in the recent mini-budget.

The average two-year fixed mortgage rate on the market on Wednesday this week was 6.46%, according to Moneyfacts.co.uk, while the average five-year fixed deal was 6.32%. Both of these average rates are the highest since 2008.

New instructions to sell have continued to fall, Rics said, with stock levels remaining at historic lows.

Estate agents are holding just 34 homes on average on their books, and the pipeline appears to have deteriorated further, with the number of new market appraisals falling overall.

Sales volumes have been falling for five months in a row and are at their worst levels since May 2020, in the early period of the coronavirus pandemic.

Property professionals’ sales expectations over the next three months and 12 months remain negative.

A net balance of 18% of property professionals expect house prices to fall rather than increase over the next 12 months.

They cited expected further substantial rises in mortgage rates as a factor, Rics said.

In the lettings market, tenant demand has picked up alongside a fall in landlord instructions, Rics added.

As a result, near-term expectations point to further strong growth in rental prices over the coming three months.

Rics chief economist Simon Rubinsohn said: “The turmoil in mortgage markets in recent weeks has compounded the increasing level of economic uncertainty resulting from higher energy bills and the wider cost-of-living crisis, in shifting the dial in the housing market.

“Even though the headline price balance remains in positive territory for now, storm clouds are visible in the deterioration of near-term expectations for both pricing and sales. Looking further out, the picture portrayed by the Rics survey has clearly shifted in a negative direction.

“How this plays out in terms of hard data will inevitably depend in part on the state of the mortgage market once it settles down, but it is difficult not to envisage further pressure on the housing sector as the economy adjusts to higher interest rates and the tight labour market begins to reverse.

“For now, mortgage arrears and possessions remain at historic lows but they are inevitably going to move upwards over the next year, as pressure on homeowners grows.

“However, as lenders have been a lot more cautious through this cycle, with high loan-to-value mortgages accounting for a much smaller share of the lending book than in the past, this should help to limit the adverse impact on the market.”

Tom Bill, head of UK residential research at Knight Frank, said: “An era of double-digit price growth was already coming to an end but the mini-budget looks set to accelerate that process.

“Sentiment has been damaged as lenders have struggled to fix rates, marking the end of a 13-year period of ultra-low borrowing costs. While we expect downwards pressure on prices, we do not expect the scale of declines seen during the global financial crisis thanks to record-low unemployment and well-capitalised lenders.”

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