House sales plunge to lowest in a decade

The Changing Landscape of UK Housing Market: Sales Slump to Decade-Low Amidst Rising Costs

The UK housing market is undergoing a significant transformation, marked by a dramatic decline in house sales, driven by the impact of higher borrowing costs. According to Zoopla’s latest house price index, property transactions are projected to plummet by 21% this year, marking the lowest annual sales figures since 2012. The key factor behind this decline is a staggering 28% reduction in mortgaged sales, while cash buyer transactions are expected to remain steady in line with 2022 levels.

While sales of smaller, more affordable homes have experienced modest drops, the market for larger, pricier properties, such as three and four-bedroom houses, has taken a substantial hit. Comparing last month’s figures to the average of the previous five Julys, sales of these premium properties have plummeted by up to 40%.

As a result, the total number of house sales in the UK this year is anticipated to barely breach the one million mark, falling short of the longstanding average of 1.26 million transactions. Even landlords are grappling with challenges as the expansion of their property portfolios faces hurdles. The issuance of new buy-to-let mortgages has accounted for a mere 8% of house sales this year. Lenders now demand nearly half of a property’s value in southern England as a down payment, making it an uphill battle for investors to meet the criteria.

However, the grim picture for investors is not limited to landlords alone. Potential rental yields of less than 5%, which now fall below the Bank Rate, have made the investment landscape less appealing for many.

These challenges in the market are underscored by the recent report from trade association UK Finance, which highlighted an identical 28% decline in first-time buyer purchases during the second quarter of this year. One major contributing factor to this phenomenon is the growing proportion of mortgage repayments relative to individuals’ take-home pay. This ratio is approaching levels reminiscent of the 1980s, making it tougher for borrowers to meet lenders’ affordability standards, especially considering the concurrent rise in interest rates and living costs.

Richard Donnell, the executive director at Zoopla, commented on the situation: “Higher borrowing costs have taken the biggest toll on the number of sales, particularly among buyers reliant on mortgages. Cash buyers, however, remain relatively unaffected and are predicted to account for more than a third of sales in 2023. While mortgage rates are slowly receding, they need to fall below the 5% threshold to stimulate increased interest in moving homes in the latter half of the year.”

The disparities in housing affordability across different regions in the UK are evident, particularly in southern England, where the necessary household income to purchase an average-priced home exceeds £75,000. The timeline to save for a down payment has also extended significantly, from 6.8 years in 2012 to nearly 10 years in the previous year, as reported by Generation Rent, an advocacy group.

A potential remedy lies in the prospect of lower interest rates, which could alleviate the burden of repayments. However, this outcome depends on a multitude of factors, including declining inflation rates, sluggish wage growth, increased unemployment, and lenders maintaining healthy interest rate margins. Regrettably, short-term projections do not bode well for these prerequisites, leaving potential buyers with two choices: postpone their buying plans or proceed with a purchase despite the financial strain.

While the trajectory of falling house prices and rising wages offers a glimmer of hope, affordability remains a pressing concern. Zoopla’s predictions indicate a potential 9-10% improvement in affordability this year, as prices experience modest declines and average earnings witness growth. By the end of 2023, the UK’s house price to earnings ratio is projected to align with the 20-year average, settling at 6.3 times.

However, the substantial double-digit growth in house prices observed during the pandemic has yet to reverse. According to data from high street bank Nationwide, house prices have decreased by around 4.5% since the peak of last year. The HM Land Registry, on the other hand, reveals that the average UK house price in June 2023 was £288,000—£5,000 higher than the previous year, but still £5,000 lower than November’s figures.

In conclusion, the UK housing market is grappling with its lowest sales figures in a decade, driven by the impact of rising borrowing costs, especially on those reliant on mortgages. While various factors contribute to this downturn, including disparities in regional affordability and the challenges faced by investors, there is a glimmer of optimism in the potential for lower interest rates to provide relief. As the market recalibrates, potential buyers are left to navigate a complex landscape of choices, either delaying their plans or entering the market with caution amidst changing financial dynamics.