It’s time to check in on the UK house market, everyone’s favourite topic.
First, the number of deals needs to be higher. The latest figures on mortgage approvals for July, which came out last week, showed that the number of new home purchases had dropped to about 49,400 from more than 54,000 in June.
Second, house prices are going down, but they are going down so slowly that it will bother sellers and annoy buyers.
They tend to move in the same direction, and the most current data from Nationwide shows a big drop from one year to the next. Prices are now down 5.3% from the peak, which, when inflation is considered, is equivalent to a “real-terms” drop of about 12%.
So, what now?
Pressure stays on home builders.
This morning, Barratt Developments Plc, a company that builds homes, released its annual statistics. These were eagerly awaited partly because Crest Nicholson Holdings Plc, another builder, sent out a bad profit warning at the end of last month.
The good news for Barratt owners is that the company didn’t do the same thing today. Even though the results were mostly in line with predictions, the share price didn’t go through the roof. At the time of writing, they were down about 2%.
The main problem has been the same all year. Since interest rates are going up, so are mortgage prices. As mortgage rates go up, even the most eager first-time buyers can only borrow a little to buy a brand-new home.
Because of this, builders can’t sell as many homes at the prices they’d like to. Like any other unhappy home seller, they don’t want to lower the price unless they have to.
On top of that, the Help-to-Buy-Housebuilder-Executives-a-Ferrari-or-maybe-a-Tesla-for-the-ESG-inclined plan has ended, which hasn’t made things any better.
So far, this has mostly shown up as a drop in sales. Last year, the average sales rate in July and August was 0.6 houses per store per week. At that time, the effects of rising interest rates were already being felt. This year, the number is 0.42.
The most obvious thing to expect is that builders will offer more incentives to sell homes, which is the same as cutting prices without being too obvious about it. They will also build less, so they will have to cut staff and be careful about their plans to buy land.
When it comes to investments, housebuilders have taken a big hit. Most buyers are waiting for proof that interest rates have reached their highest point before they jump in.
But what does that mean for the home market as a whole?
The limits of what people can afford are being reached.
The main thing the continuing problems with transactions show is that we’re still at an impasse. Every home has a “clearing price,” which is the price it will sell. The problem is that for most homes, that price is lower than the seller’s willingness to accept.
Will the scales tip one way or the other in the second half of the year?
The trade group for the industry, UK Finance, released its review of family finances for the second quarter at the end of last month. There are a few interesting bits in there.
There are some signs that people who want to buy a home are running out of ways to make it more affordable. After going up quickly last year, the number of new mortgages with terms of more than 30 years has levelled off at about 55%.
That means increasing maturity dates “to make payments more affordable” might have reached its limit, says UK Finance. In short, there may be little room for the demand side to grow.
There are also some hints that the cost of living is getting harder for people who already own their homes; this can be seen in the figures on remortgaging. If you refinance with your current lender, you might not get the best rate, but you won’t have to take any new tests to see if you can afford the new loan.
More people are refinancing with their present lender, according to the data. Either a lot of people are lucky enough to already be with the lender with the best rate, or they can only get a loan somewhere else.
To be clear, that only sometimes means those people are having trouble paying their bills. Other lenders might hesitate to loan them because they must test for higher interest rates.
There are also signs that families are spending some of their (still large, on average) savings from the pandemic to keep up with rising costs. However, there has yet to be a noticeable rise in overdrafts or signs of more people relying on credit cards.
Overall, this shows that the housing market will stay slow because it’s still hard for people to buy homes. But it doesn’t look like “forced selling.” Instead, it suggests that nominal prices will keep going down in a slow, steady “drip, drip” fashion.
The new normal gets two cheers.
This doesn’t have to be a bad thing. It could be annoying for everyone. But, as I’ve said many times before, if real wages go up and true house prices slowly go down without collapsing, more people will be able to buy a house, and we won’t have to deal with the pain of foreclosures or banks going bankrupt.
I can think of the following as the biggest risks:
One, inflation might decrease less quickly than the Bank of England thinks. The Bank may very well stop at 5.25 per cent this year. However, if prices for things like petrol keep going up, inflation may look worse in 2024. If markets start to think that rates will go back up to 6.5% or higher, that would hurt the home market.
Two, a decline could happen. If that happens and unemployment goes up a lot, people will be pushed to sell; this would put a lot more pressure on prices, even if it gave the Bank a reason to lower interest rates, which would be a possibility.
Still, I’m hoping for a good result. I don’t see a good reason for the Bank of England to raise rates much more from where they are now, but I also don’t see a good reason for them to lower them.
Now that interest rates are back to what could be called “normal” for the long term, it’s hard to see why the Bank would want to let them drop again so close to zero, especially after all the trouble that caused.
Getting used to a “new normal” in a slow but steady way may be the best we can do here. I’d take it.