The Impact of Rising Mortgage Rates on Home Sales

Introduction:

In recent times, the housing market has experienced a significant decline in home sales, reaching their lowest level since moves were banned during the pandemic. The slump in residential transactions, particularly notable in April, can be attributed to the shock of the autumn surge in borrowing costs. This blog post aims to explore the factors contributing to this decline, the implications it has on the housing market, and the predictions for the future.

Decrease in Home Sales:

According to data from HM Revenue and Customs, residential transactions witnessed a 29% drop in April, with a total of 67,220 transactions recorded [1]. This marked the lowest monthly sales total since the 2020 lockdown period when viewings were prohibited, indicating the severity of the current situation. In fact, even excluding that extraordinary period, April became the worst month for house sales in a decade, harking back to the market’s recovery from the financial crisis.

The Role of Mortgage Rates:

The current slump in home sales can be largely attributed to the sharp increase in mortgage rates since September’s mini-Budget. In just four weeks after the statement, the average two-year fixed-rate deal climbed from 4.7% to 6.65%, significantly impacting the market [1]. This sudden spike in rates is now affecting the spring transaction data, given that the average property deal takes around five months from sale agreed to completion [1]. The rise in mortgage rates comes after a period of declining rates following their October peak, leading analysts to express concerns about a potential worsening of the slump in the coming months [1].

Uncertainty and Lender Actions:

The return of gilt yields to levels last seen during the autumn, driven by unexpectedly high inflation, has prompted traders to bet on future interest rate rises . City analysts now predict a peak in the Bank Rate at 5.5% . As a result, lenders have begun repricing their fixed rates upwards, leading to a withdrawal of fixed-rate residential mortgages and buy-to-let deals from the market [1]. Moneyfacts reports that 390 fixed-rate residential mortgages and 311 buy-to-let deals were withdrawn by banks since last Monday.

Implications and Predictions:

Lucian Cook, head of residential research at Savills, warns that the housing market is about to experience another dip. With underlying inflation proving difficult to control and mortgage costs on the rise, Cook suggests the possibility of a W-shaped recovery in the housing market throughout 2023 and 2024.

Conclusion:

The slump in home sales, reaching their lowest level since the pandemic-induced moves ban, has significant implications for the housing market. The sharp increase in mortgage rates following the mini-Budget in September has been a major contributing factor to this decline. With rising rates and uncertainty about future borrowing costs, lenders have started to withdraw fixed-rate deals from the market. The predictions for the housing market remain cautious, with experts warning of a potential further decline in the coming years.

Questions and Answers

Q1: What is the current state of home sales in the housing market?
A1: Home sales in the housing market have experienced a significant decline, reaching their lowest level since the moves were banned during the pandemic .

Q2: What was the percentage drop in residential transactions recorded in April?
A2: Residential transactions witnessed a 29% drop in April .

Q3: Why did the housing market experience a slump in home sales?
A3: The slump in home sales can be largely attributed to the sharp increase in mortgage rates since September’s mini-Budget.

Q4: How did the rise in mortgage rates impact the housing market?
A4: The average two-year fixed-rate deal climbed from 4.7% to 6.65% in just four weeks, significantly impacting the housing market.

Q5: What actions have lenders taken in response to the rise in mortgage rates?
A5: Lenders have begun repricing their fixed rates upwards and have withdrawn fixed-rate residential mortgages and buy-to-let deals from the market.