Is the UK housing market cooling?

Despite cold weather and heavy snow in Salisbury, south-west England this week, estate agent Chris Husson-Martin is already at work at 7am. “Nothing stops,” he said, adding that despite the snow, “we only had one cancellation.”

Like other estate agents around the country, he is working overtime to repair the damage to the housing market caused by Liz Truss’s “mini” Budget in September, which saw mortgage rates suddenly jump to around 6 per cent, which Husson-Martin says has “hugely” caught off guard people”.

“We’ve had businesses go out of business because people couldn’t afford them anymore,” he recalled. But after mortgage rates stabilized at around 4 percent, some of the failed purchases turned good — albeit at lower prices. “The two of us agreed again [with] the original customers,” he said.

The discounts represent a significant turnaround after more than two years of overheated house prices, spurred by very low borrowing costs and government incentives that have just ended.

Price cuts are one of many indicators that the UK housing market is cooling. In January, mortgage approvals fell to their lowest level since May 2020, when the market was largely shut down due to the Covid-19 lockdown. Excluding the pandemic, the number of approvals was the lowest since 2009.

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Separate figures from mortgage provider Nationwide this month showed average house prices fell to £257,400 in February from a peak of £273,800 in August 2022. The latest data from the Land Registry show that they fell by 0.4 percent between November and December.

Line chart of average house prices, £000, showing how UK house prices have cooled since last year's 'mini' budget

“I suspect that buyers’ expectations of what a house is worth will be rekindled,” said Tomasz Wieladek, chief European economist at asset manager T Rowe Price. He expects home prices to fall 10 to 15 percent from their peak and predicts the market will be a “war of attrition” between buyers and sellers, with “the buyers eventually winning.”

An influential survey published this week by the Royal Institution of Chartered Surveyors revealed that 60 to 70 per cent of properties sold for less than their asking price last month. They also found that higher borrowing costs and inflation are squeezing budgets and dampening demand, which has fallen for 10 consecutive months.

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According to real estate portal Zoopla, the average price discount in the UK in February was 4.5 percent. But agents say the market is fragmented, with discounts available for some housing types, such as condos, but very little supply of sought-after properties, such as single-family homes. According to the RICS survey, the stock of residential properties for sale is near the lowest level since records began in 1978.

“It’s a real scarcity problem that’s keeping house prices quite strong,” said Sophie Sharman, head of sales at Hamptons in Balham, south London. He added that buyers looking for a home costing around £1.5m in the area last year would “see 20 houses on a Saturday” but now “maybe see two or three viable options”.

Agents say the lack of residential properties may reflect potential sellers waiting for a more buoyant market. “Most people don’t need to move or sell. As we saw in 2008, instead of accepting the low price, they just . . . try again in a year,” said Matthew Leonard, director of Winkworth in Bath. “It’s a desperate shortage of properties and some very, very disappointed buyers.”

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However, good deals can be found in disadvantaged parts of the market, especially in apartments, where first-time buyers make up the majority of demand. “First-time buyers are fueling this market. They are very nervous,” Sharman said. “They’re not getting the mortgage deal they want, so they’re almost asking the seller to make up the difference in price.”

A line chart of first-time buyers, the percentage of take-home pay showing mortgage payments in the UK, has increased

These buyers are entering a market with historically high home prices that have rebounded during the pandemic. According to Nationwide, despite the recent decline, average house prices are still £41,000 higher than they were in February 2020, just before the first Covid-19 restrictions were introduced. By comparison, prices rose by just £10,000 in the three years to February 2020.

As a result, Nationwide found that first-time buyers’ mortgage payments rose to 39 percent of take-home pay, the highest rate since 2008.

Some analysts predict that buyers will adjust to higher borrowing costs and demand will return.

“While there have been a lot of headlines about falling prices, they’re basically just coming back to reality after years of a Covid-happy market,” Leonard said.