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Surge in House Price Reductions as Mortgage Rates Climb, Zoopla Reports

Zoopla’s most recent House Price Index has disclosed a surge in sellers (42%) who are agreeing to a minimum of 5% off the asking price to secure a sale – a peak not seen since 2018. The shift in the market, induced by rising mortgage rates, bolsters buyer power for the remainder of 2023.

The pressures of rising mortgage rates and the cost of living are resulting in buyers asserting harder bargaining strategies than in recent years. A significant 42% of sellers have settled for discounts exceeding 5% on the asking price, with 15% accepting markdowns of more than 10% off the initial asking price.

The escalating mortgage rates, tipping above 5%, have further impacted purchasing power for those reliant on a mortgage – a substantial 70% of sales. The transition in rates from 4% to 5% alone has resulted in an 11% reduction in buying power. A rise to 6% amplifies the decline in purchasing power to 20%.

The impact on buying power won’t immediately translate into a drop in house prices. Buyers can buffer the effects of higher mortgage rates by increasing their deposits or opting for longer mortgage terms. However, these alternatives are not feasible for all, and as mortgage rates increase above 5%, a larger number of buyers will find themselves priced out of the market.

This trend is already apparent according to Zoopla’s data, with 14% fewer buyers in the market in the last month compared to a year ago. However, the buyers who remain are determined, with the number of agreed sales running 8% above the five-year average.

The annual house price growth rate has slowed significantly over the past year, currently at +1.2%. A rebound in sales this Spring, as mortgage rates approached 4%, halted house price falls over the last quarter, following four months of quarterly price drops. However, Zoopla predicts a return to moderate quarterly house price falls throughout the second half of 2023, as mortgage rate increases impinge on purchasing power amidst continuous rises in the overall cost of living.

This deceleration in annual growth mirrors patterns across most UK regions. Wales leads with the highest house price growth at +2.5%, while Northern Ireland trails with -0.8%.

Looking ahead, the principal threat to house price growth, barring a faltering economy, is a sudden surge in property supply. There are early signs of supply growth exceeding the average rate, with 18% more homes listed for sale in the last month compared to the five-year average.

On a regional scale, Scotland, the North East, and London are demonstrating more resilience in market activity. In contrast, market conditions in southern England and the Midlands, where house prices soared the most during the pandemic, are comparatively weaker.

Reflecting on the report, Richard Donnell, Executive Director at Zoopla, remarks, “The housing market and homebuyers’ resilience will be put to the test once again as mortgage rates climb above 5%. Earlier this year, a drop in mortgage rates to 4% prompted a sales rebound and minor monthly gains in house prices. However, modest price falls will resume in the second half of 2023 as the supply of homes increases, affording buyers more choice and negotiation leverage on price. We still foresee house prices being 5% lower over 2023.”

Sarah Coles, head of personal finance at Hargreaves Lansdown, predicts, “Mortgage rate increases could precipitate a housing bargain spree in the second half of the year. An alarming 15% have had to accept a 10% discount – or more. If rates persistently stay higher, this could just be the start of it.” She suggests keeping a watchful eye on the number of properties hitting the market, as more forced sales could make Zoopla’s prediction of a 5% price fall look relatively optimistic.