many years, home ownership In the UK it was a one-way bet. Prices have risen steadily since the global financial crisis, It increased significantly after the pandemic started.
Fueled by post-lockdown buying frenzy, average UK house prices hit a record £275,000 ($315,474) in December, an increase of £27,000 from the previous year’s high.buyers Homes benefited from tax cuts for the first time The lowest mortgage interest rates kept me in monthly payments despite the high house prices. Affordable.
Prices have risen every year since falling 1.1% in 2012. According to national data, A major mortgage lender. now boom finished.
had already faded Long before Liz Truss and Kwasi Kwarteng blew up the British bond market And sent the loan costs through the roof.However financial market turmoil The former prime minister and her then finance minister’s underfunded tax cut plans made matters worse.
The ensuing sharp rise in mortgage rates has made buying a home much more expensive, with some forecasters projecting prices to plummet by 10% to 15% over the next year or so.
Much of Truss’ tax cuts have been scrapped by new Finance Minister Jeremy Hunt and Prime Minister Rishi Sunak, and the bond market has calmed down, but the era of low debt that has pushed home prices higher than ever is coming to an end. The Bank of England is widely expected to raise interest rates It was the eighth time since December when they met on Thursday that they raised the benchmark interest rate to 3% from near zero late last year.
This will keep mortgage rates going up even without the current level of inflation.
“I think the only thing that can happen in the short term is a return to where we were at the end of August,” said Tom Bill, head of UK housing research at broker Knight Frank. After the housing market readjusts to mortgage rates no lower than 1% or 2%, a bigger and broader psychological shift must occur.”
UK mortgage rates will drop from spring onwards rising interest ratesHowever, Truss and Kwarteng’s ‘mini’ budget on Sept. 23 put these increases into overdrive.
“The minibudget has increased mortgage rates by 1 percentage point,” said Richard Donnell, executive director of research at online real estate portal Zoopla.
The promise of big tax cuts but no payment plan to pay for them sent the bond market crashing and pushed up borrowing costs for lenders. David Hollingworth, associate director of communications at broker L&C Mortgages, said: “The biggest direct impact has been the accelerated pace of change in mortgage rates.
Within a few days, the lender Pulled over 1,500 products More than half have yet to return to the market, according to financial product comparison site Moneyfacts.
Despite Kwarteng and Truss exiting and most of the tax cuts in place, mortgage rates have yet to return to the levels they had before they announced their devastating economic plans.
Average two- and five-year fixed rates were 6.47% and 6.32% on Tuesday, the highest since 2008, according to Moneyfacts.
For a typical borrower with a mortgage worth 70% of the house value, that would add £500 ($574) to monthly payments, Donnell said.
A dramatic interest rate reset has left some homeowners spending thousands of pounds on early refinancing, fearing interest rates could rise further.
London-based tax accountant Callum Heer decided to refinance a two-year fixed mortgage a year ahead of schedule, cutting interest rates from 1.75% to 3.57%. This will result in an additional charge of £375 ($424) per month until January 2028.
“We really had no choice,” he said. Although he cost £4,500 ($5,162) To switch trades early, Heer wanted the certainty of a fixed interest rate. As he told CNN Business, “I have no idea what’s going to happen with interest rates.”
Tudor Nanu and his wife, who bought a house in February, are considering the same. Healthcare workers in the South East of England are gearing up to refinance their £6,000 ($6,883) charges early, almost double what they have been paying so far. The higher rate would cost him an extra £500 ($574) a month on top of the one-off refinancing hit.
Government bond yields fell in October, and so did swap rates (a measure of banks’ funding costs used to determine mortgage rates).in short mortgage interest rate It may go down in the next few weeks.
Still, there’s no going back to the “very lows of recent years,” said Donnell, who believes 4% to 5% will be the new normal for mortgage rates.
This will come as a shock to millions of homeowners who bought a home when interest rates were much lower. According to Bill at Knight Frank, more than 4 million home loans have been issued to first-time buyers since 2009 when interest rates “bottomed out.”
“So many people don’t understand when their monthly spending increases,” he told CNN Business.
As many as 1.8 million borrowers with fixed-rate mortgages will have to refinance next year, according to think tank Resolution Foundation. About 300,000 fixed-rate deals will close between October and December, said Neil Hudson, a housing market analyst at research firm Builtplace.
“Financial pain will spread across the housing market as more buyers face the reality of their mortgage bills rising by hundreds of pounds each month,” Bill added.
Signs of an economic slowdown are already beginning to emerge, with banks taking a more cautious approach to lending and home buyers delaying purchases as borrowing costs have become much higher.
UK house prices fell 0.9% in September-October, the first decline in 15 months. According to national data. The average home price is now £268,282 ($309,396).
Housing loan approvals also fell to 66,800 in September from 74,400 in August, according to data released by the Bank of England on Monday.
Zoopla’s Donnell said: Demand from new buyers fell 30% from the truss budget. “There was Scrabble to do the deal right after the minibudget, and even now there are sales, but he has a 20% lower execution rate than normal,” he said.
Alan Edwards, a local government official from the north of England, was about to start looking for a house, hoping to buy early next year until a mini-budget sent mortgage rates skyrocketing.
“I doubt it’s happening right now,” he told CNN Business.Edwards expected interest rates to rise in the coming months, but said it wouldn’t be “this fast.” “We really need to pay attention to the government right now because they can drive up our costs by creating a bad week for themselves.”
Buyers won’t be able to borrow as much, and prices will fall. For example, consider a person who a year ago he could afford to use £1,500 ($1,700) per month for 25 years. mortgage. At his 1.75% interest rate, which hit a low in September 2021, the person could have borrowed £378,000 ($433,000). Today, the interest rate is her 5.5%, so the monthly payments are enough for him to take a £244,500 ($280,000) mortgage.
A decline in purchasing power will inevitably lead to a significant drop in house prices, said Andrew Wishart, a senior economist at Capital Economics.consultant We expect a 10% to 15% price decline between now and 2024. Credit Suisse makes similar predictions.
it’s a wider issue uk economygiven that 36% of household wealth is tied to real estate, according to data from the National Bureau of Statistics. and forgo additional investment.
Homeowners may already be consolidating their finances in anticipation of increased mortgage payments. Households deposited a further £8.1bn ($9.3bn). It’s the biggest increase since June 2021, compared with £3.2 billion ($3.7 billion) in August, according to Bank of England data.
Even if the fall in house prices simply returns prices to pre-pandemic buyout levels, the UK economy will suffer because many sectors of the economy depend on it, from financial services and construction to moving companies and furniture stores. will deal a heavy blow toon strong and active housing market.
A 2020 analysis by Knight Frank and the British Property Federation found that every 100,000 home deals involving existing homes benefit the UK economy by almost £1 billion ($1.14 billion). rice field.
“Rising debt service, falling property prices and weak construction will be the main factors pushing the economy into recession,” Wishart said.