First-time buyers see their hopes dashed by rising interest rates and rising rents
UK property prices are set to fall 12% as those looking to land their first home see their purchasing power destroyed, economists have warned.
The warning comes as the average interest rate for a two-year fixed-rate mortgage rose above 6% for the first time since 2008, according to financial data provider Moneyfacts.
The market has already started to calm down, even before taking into account the recent spike in mortgage rates. Data from mortgage lender Halifax showed average house prices fell 0.1% between August and September.
Meanwhile, tenants face a more than 20% increase in rental costs over the next five years, according to forecasts from real estate agent Knight Frank.
First-time buyers aren’t just facing increased rent: they’re also dealing with the full force of rising costs across the economy, from energy bills to groceries.
“This destruction of purchasing power excludes first-time buyers from the market. Many simply cannot afford to buy at current prices,” said Andrew Wishart, property economist at consultancy Capital Economics. The Independent.
And while the average house price is expected to fall by around 12% by the end of 2024, according to Capital Economics, inflation is also expected to rise further, eroding savings for housing deposits. The Bank of England has predicted that inflation could reach 13% in January next year.
A weakened position for renters and first-time buyers is impacting the outlook for the housing market as a whole, Wishart said. “Once that happens, it spreads more to the middle and high end of the market,” he explained.
“It’s going to be very difficult to climb the housing ladder next year. You also don’t want to buy in a falling market at a high interest rate.
Lenders are required by the city’s watchdog, the Financial Conduct Authority (FCA), to ensure borrowers can pay their mortgage repayments even if rates rise. Given market expectations for rate hikes, the average loan-to-income ratio – a yardstick by which repayment costs are measured – could rise from 4 to 3.7 by next summer.
In practical terms, it would reduce the maximum mortgage a typical first-time buyer household with an annual income of £55,000 could get, from £275,000 to £203,000, according to Mr Wishart.
The UK is not the only market where rising interest rates are weighing on potential homeowners and tenants. Central banks, including the US Federal Reserve, attempt to curb inflation by raising interest rates in developed economies.
However, the Truss government’s mini-budget management and resulting market volatility accelerated the rise in mortgage interest rates, economists and investors said.
The housing market won’t be able to “sustain rates up to 5% or 6%,” Mark Dowding, chief investment officer at Bluebay Asset Management, said in a note.
And he added that the mini-budget “probably did more to damage confidence and push the economy into recession than it did anything. [to] stimulate aggregate demand.
The rising cost of debt tends to make businesses and consumers more pessimistic, but that has been made worse by recent policy interventions, economists said.
“The huge volatility caused by the mini-budget has shaken people’s confidence,” said Suren Thiru, chief economics officer at the Institute of Chartered Accountants in England and Wales.
“It’s not just the impact of the mini-budget itself, however. This is the new perspective of Austerity 2.0,” he added, noting suggestions from the Prime Minister and Chancellor that public spending will need to be cut in order to fund the promised tax cuts.
The cost of government borrowing rose sharply following Chancellor Kwasi Kwarteng’s mini-budget, triggering intervention by the Bank of England in the bond market.
Expectations about the effect on inflation and interest rates rose as markets weighed the potential impact of sweeping tax cuts first announced by Mr Kwarteng last month. Investors were also rattled by a lack of clarity on what the policies would mean for UK public finances absent the usual assessment from the independent Treasury watchdog, the Office for Budget Responsibility (OBR). ).
Liz Truss and Mr Kwarteng then returned to plans to cut the 45% tax rate for high earners and said they would work with the OBR to provide economic and fiscal forecasts alongside government spending plans. next month, after rejecting the OBR’s previous offer of a new forecast in time for the mini-budget.
Ms Truss said the government was helping first-time buyers by raising the stamp duty threshold, above which tax is payable on property transactions, from £300,000 to £425,000.
Economists do not expect this to outweigh the greater impact of higher borrowing costs on the housing market.
Mr Kwarteng met with mortgage providers on Thursday, as bank chiefs urged him to consider an extension of the government’s mortgage guarantee scheme to help manage the risks of lending to new borrowers.