Rising Mortgage Costs ‘Spook’ UK Housebuyers Leading to Increased Price Discounts

Introduction

As mortgage rates in the UK continue to soar, housebuyers are feeling the pinch, resulting in a surge in price discounts. According to research conducted by property website Zoopla, two-fifths of sellers in the UK are now accepting discounts of more than 5 percent on their asking prices. This trend is a direct reflection of the impact of rising mortgage rates and the broader cost of living crisis. In this blog post, we will explore the implications of these price discounts and the changing dynamics in the housing market.

Increasing Price Discounts

Over the past two weeks, Zoopla’s research found that 42 percent of homeowners accepted discounts of at least 5 percent to facilitate a sale. This marks a substantial increase compared to the year-to-date average of 35 percent. The research predicts that as we enter the summer, traditionally a quieter period for the housing market, sellers will increasingly be open to accepting larger discounts.

The Impact of Mortgage Rate Increases

The recent surge in mortgage rates has had a significant impact on buyer behavior, prompting them to become more price-conscious. Richard Donnell, Zoopla’s research director, states that rising rates have “spooked” buyers, forcing sellers to reevaluate their pricing strategies. The analysis conducted by Zoopla indicates that a 1 percent increase in mortgage rates, from 4 to 5 percent, reduces a purchaser’s buying power by 11 percent. This reduction escalates to 20 percent with a 2-point rise to 6 percent.

Current Mortgage Rate Landscape

According to data provider Moneyfacts, as of Tuesday, the average two-year fixed mortgage rate stood at 6.26 percent, while five-year fixed products averaged 5.87 percent. These figures highlight the challenge faced by potential buyers in securing affordable financing.

Predictions for Property Prices

Zoopla’s research also suggests that property prices will witness a 5 percent decline in 2023. However, even with this projected decrease, prices will still remain 15 percent higher than pre-pandemic levels. Consequently, there is still room for negotiation, providing buyers with an opportunity to leverage existing equity.

Mitigating the Impact

Donnell argues that the effect of rapidly rising mortgage rates on house prices will be somewhat limited because buyers now have alternative options. These options include switching to interest-only loans or extending the mortgage term, which can help reduce monthly mortgage payments.

The Role of Sellers

Sellers, faced with the reality of economic and financial constraints, are gradually adjusting their expectations. While Zoopla’s data found that 10 percent of sellers are cutting their asking prices by 10 percent, the majority are opting for more modest discounts. The pressure on house prices is most pronounced in the south of England, where homes tend to be more expensive, and for properties priced above £400,000 that often require larger mortgages.

Conclusion

The current state of the UK housing market reveals a growing disparity between sellers’ aspirational prices and buyers’ affordability. Rising mortgage costs have compelled buyers to become more cautious and price-sensitive, leading to increased price discounts. While the market remains challenging for buyers, the availability of alternative financing options provides some relief. Sellers, too, are recognizing the need to adjust their expectations in light of economic realities. As the summer season unfolds, it will be interesting to observe how these dynamics continue to shape the UK housing market.