MHHG estate agents

The demand for homes in the UK housing market experienced a decline of 18% over the last two months due to a significant increase in mortgage rates. This decline, although less severe compared to previous instances such as the 2022 mini-budget and the first lockdown, has still brought the current demand 6% below 2019 levels. However, despite the decrease in demand, sales agreed have only seen a 17% decrease, indicating the presence of committed sellers and buyers in the market. Additionally, there has been a notable slowdown in house price growth, with UK house price inflation currently standing at +0.6% in June 2023, down from +9.6% in June 2022.

Regional Variations:
There is a clear distinction between the trends observed in southern England and the rest of the country. Higher mortgage rates have a more significant impact on buying power in southern England, where house prices are highest. Furthermore, the barriers faced by first-time buyers in these areas are greater, resulting in weakened demand from buyers who support the bottom end of housing chains. House prices in southern England, along with Northern Ireland, have seen year-on-year declines of up to -0.6%. In contrast, the other seven regions of the UK have continued to register annual price growth of over 1%, with Scotland leading the way at 1.9% higher than the previous year.

Market Projections:
The divergence in house price growth between southern England and the rest of the country is expected to widen in the second half of 2023, with further modest price falls predicted in higher-value markets. However, it is anticipated that some more affordable markets may not experience any price falls throughout 2023. Markets with average prices exceeding £300,000 are particularly vulnerable to price falls, with 4 in 5 local markets currently registering annual price declines. This is primarily due to the larger mortgages, bigger deposits, and higher household incomes required to purchase homes in these areas.

Factors Impacting Affordability:
The affordability of housing markets is influenced by various factors, including mortgage rates, local economic conditions, and living costs. Some lower-value markets, such as Sunderland, Aberdeen, and Northern Ireland, have experienced house price falls due to the impact of these factors on demand. On the other hand, affordable markets located near major employment centers continue to witness above-average price growth, as higher mortgage rates have a lesser impact on demand in these areas. This supports the demand from first-time buyers, as it remains cheaper to buy than rent in many low-value housing markets, even at higher mortgage rates.

Impact on Sales Volumes:
The shift in purchasing costs has resulted in buyers opting for smaller, lower-value homes or delaying their decision to move until mortgage rates become more favorable. Sales volumes have been significantly affected by higher mortgage rates, with a projected decrease of 23% in 2023 compared to the previous year. However, sales volumes have remained relatively stable in more affordable areas of the UK, specifically in Scotland and the North East. Sales of larger family homes have been hit harder than smaller homes, as the former requires higher prices, making them less affordable for potential buyers. This trend is expected to continue suppressing sales volumes as long as mortgage rates remain above 5%.

Outlook for the Second Half of 2023:
The outlook for market activity and prices in the UK housing market is dependent on the trajectory of mortgage rates and market expectations regarding future increases to control inflation. While mortgage rates have recently spiked, it is anticipated that they will peak over the summer and potentially fall below 5% in the autumn as the underlying cost of fixed-rate finance for banks decreases. However, the possibility of higher rates over a more extended period remains a key risk. Consequently, modest price falls of up to 5% are expected in the coming months, with house prices still remaining 15% higher than pre-pandemic levels. House price growth is expected to remain low for the next 1-2 years as prices adjust to higher mortgage rates. Regions such as southern England and the Midlands may experience very low nominal growth or modest price falls as house prices and incomes realign.

Conclusion:
In conclusion, the UK housing market has witnessed a decline in demand due to the increase in mortgage rates. This has resulted in a slowdown in house price growth, especially in higher-value markets. However, more affordable areas and markets near major employment centers have experienced relatively stable prices. Sales volumes have been impacted, with larger family homes being affected more severely than smaller homes. Looking ahead, the trajectory of mortgage rates will determine market activity and prices, with modest price falls projected for the second half of 2023.