mortgage

Mortgage activity to drop over the rest of the year

New market analysis has found that mortgage activity is set to drop over the rest of 2022 as the market feels the brunt of interest rate hikes, with some estimating a fall of as much as 6%.

Current market trends

According to Zoopla’s House Price Index for July 2022, house price growth remains strong at 8.7% over the course of the year, with the Land Registry recording a 1% rise in June alone.

On this, Zoopla conceded that it “may feel surprising that sales market activity is not weakening faster, given increases in the cost of living, rising interests and a drop in UK consumer confidence”.

Whether this remains the case in light of Ofgem’s energy bill price cap rocketing to £3,549 in October remains to be seen. “High inflation and the rising cost of living are hitting those on lower incomes first and will take longer to impact higher income households,” said Zoopla.

The market is still somewhat supported by pandemic factors, with the increase in working from home and a growth in retirement continuing to stimulate demand for homes. This is shown by the “new sales agreed” measure, which is on a par with this time last year, say Zoopla.

Activity over the rest of the year

However, the portal did say that the higher interest rates – now sitting at 1.75% – will indeed take their toll on mortgage activity in H2 2022:

“In January 2022, new mortgage rates were still ultra-cheap at less than 2%. This has now jumped to 3.5% and is set to reach 4% as we move into the autumn. This level of mortgage rates is still low by historic standards, but homebuyers have become used to very low mortgage rates. This means any reversal is likely to have some impact on demand, especially when combined with cost of living pressures.”

This was corroborated by mortgage broker Henry Dannell, who said rising interest rates are likely to dampen the mortgage market in 2022, forecasting a 6% drop in Monetary Financial Institution activity and a 16.5% drop in specialist lending.

Who will be impacted the most?

Zoopla said this will hit first-time buyers (FTB) the hardest: “Moving from a 2% mortgage rate to 4% means the average FTB will need an extra £12,250 in income, compared to when rates were lower.”

However, in most of England, buying will remain cheaper than renting for FTBs, with Zoopla saying that “the lack of a material over-valuation in UK home values means mortgage rates of up to 4% are not, on their own, sufficient to result in UK-wide price falls.” They added:

“So far, there are few signs of weaker demand and our analysis shows FTBs made up an increased share of all sales in H1 2022 – up to 35% compared to 32% in 2021.”

They did, however, concede that they “expect FTB behaviours and buying patterns to shift further in H2 in response to higher costs and the increasing possibility of FTBs being priced out of the market”.

As well as this, demand for homes is likely to be impacted most in high-value markets in southern England where affordability is “already a drag on market activity”:

“The higher the income needed to buy a home, the more households are priced out of the market which, over time, reduces the pool of demand for homes. The impact of rising mortgage rates will be felt most acutely in high-value markets in southern England.”

The outlook

Zoopla said that the fixed-rate loans and affordability stress tests have “baked resilience into the market” which will limit the downsides for house prices.

However, they concluded their report with an admission that prices, sales volumes, and thus market activity will suffer should mortgage rates continue to rise:

“It’s clear UK households are facing a squeeze on incomes and living standards on multiple fronts, which will filter through into housing market activity and house price growth into 2023.

The primary risk remains in further increases in the base rate in order to control inflation control inflation, which will have a knock-on impact on mortgage rates.

The higher rates move above 4%, the greater the impact on prices and sales volume and where homeowners have plenty of equity to cushion any future price falls.”

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