Demand drops by 18% due to surging mortgage rates. In the first half of 2023, as mortgage rates decreased to around 4%, there was a rebound in home demand, which positively impacted new sales. However, a rapid ascent in mortgage rates to 6% in the recent six weeks has dampened purchasing capacity, leading to an 18% decline in demand over the past two months. This drop isn't as pronounced as what was seen post the 2022 mini-budget or during the onset of the first lockdown. Currently, demand is operating from a diminished baseline, 6% under 2019 figures. Yearly, demand has decreased by 40%, although agreed sales are just 17% less, indicating a more determined group of buyers and sellers in the market.
The combined effects of diminishing demand and an increasing supply have resulted in a significant deceleration of house price growth. As of June 2023, the UK's house price inflation stands at +0.6%, a substantial drop from the +9.6% of June 2022. A distinct pattern emerges when contrasting southern England with the rest of the UK. In regions like southern England, where house prices peak, the effect of heightened mortgage rates on purchasing capability is more pronounced. This situation also amplifies obstacles for first-time buyers, thus undermining demand from those who typically back the entry-level segments of the property market. An annual decline of up to -0.6% in house prices is observed across all southern English regions and Northern Ireland, as depicted in the accompanying map. On the flip side, seven other UK regions, with Scotland in the lead, showcase an annual growth exceeding 1%—Scotland's house prices are now 1.9% higher than the previous year. We project a growing disparity in house price trends between southern England and the rest of the UK as 2023 progresses, with potential minor price declines in the more upscale markets. However, some of the more economically accessible markets might remain stable without any notable price drops throughout 2023.
Housing sectors with an average price tag above £300,000 are most vulnerable to reductions.
A deeper analysis of the sub-regional trends reveals that those housing markets boasting average prices above £300,000 are particularly affected by the surge in mortgage rates. Remarkably, about 80% of local markets noting yearly price reductions currently have an average price point exceeding £300,000. The accompanying chart illustrates a comparison between the annual price growth and the average house prices for 121 UK postal zones as of June 2023.
Elevated house prices necessitate larger mortgage amounts, heftier down payments, and increased household earnings for potential home purchases. As the requisite income for home acquisition climbs, it sidelines more families from the housing market, subsequently diminishing demand and driving prices downward. Markets situated in South East England, especially those neighbouring London such as SS -Southend(-1.5%), WD -Watford (-1.2%), and HP –North West Hertfordshire (-1.1%), are at the forefront of annual price declines.
While house prices in London are generally on a downward trajectory, the reduction is milder than anticipated. This moderate decline can be attributed to the city's housing sector experiencing only marginal price augmentation in recent times, especially when juxtaposed with the broader nation. Notably, prices in WC -West Central London have appreciated by 1% annually.
