Landlord Knowledge - Home of the Savvy Buy to Let Property Investor

Rising Mortgage Rates and Inflated Property Prices May Quash Optimism, Experts Warn

In June, house prices increased a meagre 0.1%, marking a 3.5% decrease year on year, with the average house price standing at £262,239. The 10% deposit needed by a first-time homebuyer now equates to 55% of the average gross annual income. While this is an improvement from the late 2022 rate of 59%, it is notably higher than the period leading up to the financial crisis.

Every quarter, around 400,000 borrowers with fixed-rate mortgages refinance their loans. This pattern indicates that by the end of the current year, a fifth of these borrowers will have refinanced, with the figure projected to rise to two fifths by the close of 2024. According to Nationwide, borrowers transitioning from a two-year fixed-rate mortgage will face an additional cost of approximately £385 per month. For those coming off a five-year fix, the increase will be around £315.

The House Price Index for June 2023, recently released by Nationwide, showed relative stability in house prices for the month. However, it also highlighted continued negative growth on a year-on-year basis.

Sarah Coles, the Head of Personal Finance at Hargreaves Lansdown, commented on the current market conditions: “A toxic cocktail of ruinous property prices and devastating mortgage rates could extinguish any residual optimism regarding house prices. While the market managed to hold steady in June, it was prior to mortgage rate increases taking effect.”

Towards the end of May, average two-year fixed mortgages were set at 5.38% and the average five-year deals stood at 5.05%. This offered house hunters a broad choice of homes on the market, as well as keen sellers, which helped drive house prices up 0.1% from the previous month.

However, by the end of June, the landscape had changed dramatically. With average two-year fixes at 6.37% and five-year deals at 5.94%, affordability took a serious hit, potentially driving a significant number of buyers away.

Coles noted, “Remortgagers face potentially catastrophic increases in their monthly payments. New regulations allow temporary changes to mortgages to provide some relief, but some people might be forced to sell their properties, unable to see any light at the end of the tunnel. This scenario could result in a steady influx of forced sellers destabilising the market.”

She maintains, however, that there is still hope. The market may have overreacted, and the Bank of England does not believe the extreme increases currently being factored in are necessary. If signs of easing inflation emerge, it could result in falling mortgage rates. Also, a strong jobs market and the desire of many to escape high rents could ensure a continuous demand for properties, potentially shielding the market from serious price drops.

Nationwide published its House Price Index for June 2023: House prices relatively stable in June but annual growth remains in negative territory (