Residential Real Estate

Goli-Michelle Banan
February 2023

Director and Head of Residential Real Estate Goli-Michelle Banan highlights the calming of the UK housing market and positive trends related to reducing interest rates and lenders’ increasing willingness to lend.

Goli-Michelle’s article was published in FTAdviser, 6 April 2023, which can be found here, Mortgage Solutions, 30 January 2023, which can be found here, and in Today’s Conveyancer, 24 February 2023, which can be found here.

The UK housing market had a rollercoaster ride last year: house prices hit record levels, the Bank of England’s base lending rate increased nine times in the 12 months to December 2022, rising from 0.25% to 3.5%. It created a lull in market activity and put the brakes on property prices.

So, what next? Optimists argue that a crash will not happen with current mortgage rates predicted to fall by up to 25% this year. They also point to big lenders – HSBC, Barclays, Lloyds and NatWest – agreeing forbearance measures to help struggling borrowers: switching them to interest-only or competitive fixed-rate deals. Around 1.8m people will need to re-mortgage when their fixed-rate deals expire this year.

Schroders research shows that average UK house prices are more than eight-times average earnings; in London, that ratio rises to 11 times. Such stories make good headlines, but the economic mood is gradually changing – from general gloom to a more nuanced outlook. Notably, the shift in economic sentiment is reflected by reducing rates for new 2-year and 5-year fixed mortgages: after rising from 3 per cent in January 2022 to spike at 6.5 per cent last October, they have since fallen back towards the 5 per cent mark.

For potential buyers, interest rates are critical because they directly affect both affordability and lenders’ willingness to lend. After a decade of low interest rates, recent sharp swings have been unsettling.

Assorted lenders – Santander, Barclays, Nationwide and Halifax – now forecast imminent rate reductions to average around 4.5 per cent. Unusually, this comes as base rate is anticipated to reach 4 per cent later this month.

Mortgage rate cuts by big commercial lenders make the market more attractive and more affordable for domestic and first-time buyers – not just to overseas or cash buyers as happened when rates hit their recent highs. Despite media hype about reducing their mortgage lending, banks still have the appetite to lend.

After last year’s shocks, calm has returned. Much has been digested by the market, including the ‘new normal’ in interest rates. Potential increases are now factored into people’s thinking, so industry professionals can advise with greater confidence on where rates may head next.

Whenever the UK housing market is reportedly down, history shows it is never down for long. Buyers with available funding should press ahead on properties they really want. Good housing stock is not always available: in busier markets, people often lose out because of increased competition. Only those who are not yet able to buy should be waiting.

One caveat arises: UK incomes need to increase in real terms to boost domestic buyers’ purchasing power.  Without that, the market may still remain more attractive to overseas and cash buyers.