UK House Prices Start To Tumble

Introduction
According to the latest data from the Office for National Statistics (ONS), house prices in the UK fell 2.1% year-on-year in November 2023. This marks the first annual decline since the 2008 financial crisis and suggests the long-running UK housing boom may finally be over. In this blog, I’ll analyse the key factors behind the slide in prices and what it could mean going forward.

Rapid Mortgage Rate Rises

A key driver of falling prices is the ultra-fast rise in mortgage rates over the past two years. Back in December 2021, the Bank of England base rate sat at just 0.1%. But as the central bank has raced to curb inflation, it has lifted rates sharply. They now stand at a 15-year high of 5.25%.

Naturally, mortgage rates have followed suit. Today’s best fixed mortgage deals charge around 4% plus fees. Just three years ago, it was possible to get a rate below 1.5%. On a £250,000 home, monthly payments have spiked from £965 to £1,389 – a jump of 44%.

Putting the Squeeze on Households

This sudden affordability shift has put household budgets under real strain. Based on ONS average earnings data, mortgage costs as a share of take-home pay have likely risen from around 40% to 50% over the past three years. Finding an extra 10% of your pay to cover housing is hugely difficult for most people.

To put the scale of the affordability crisis in context, three years ago a monthly mortgage payment of £965 would have supported borrowing of £250,000. Today, the same £965 monthly sum only supports £174,000 of borrowing – a 30% decline in purchasing power.

Surprisingly Small Price Reaction (So Far)

Against this backdrop, it’s surprising UK prices have only just started to drop and by a relatively modest 2.1% so far. In a well-functioning market, you would expect such a large shift in affordability to result in a much heavier correction as buyers pull back.

There are a few likely reasons the headline figures understate the true declines:

1. Transaction volumes have fallen much faster than prices – they are down over 20% annually suggesting a steep drop at the lower end of the market.

2. Falling volumes may flatter average prices if fewer cheap homes are selling compared to expensive properties.

3. Official price indices like the ONS measure lag actual market shifts by 4-6 months due to lags in completions data.

Mortgage and Housing Distress Rising
Either way, leading indicators suggest the early-stage slide in prices is set to continue and likely accelerate. According to the latest Bank of England data:

– Mortgage arrears have jumped 45% from a year ago to £8.8 billion
– This equates to 1.14% of outstanding balances – an early signal of stress
– Approvals for new mortgages are down over 40% annually

These figures indicate many new and existing borrowers are already struggling with housing costs following the surge in repayments over 2022. And much further pain likely lies ahead.

The Worst Yet to Come

Based on when existing mortgages were taken out and when initial fixes end, the crunch point for the housing market is only just arriving now in early 2024.

Analysis indicates the maximum number of households facing unaffordable repayment hikes happens over the next year. That suggests arrears have much further to rise and will drive a further leg down in prices as more distressed home sellers are forced to accept low offers.

Adding to the downdraft, real incomes are also still falling thanks to high inflation and energy costs. This is crimping potential buyers’ ability to save for deposits or secure financing. Based on the lag between agreed sales and completions, the market turbulence feed through into official price indices over the remainder of 2024 could be very significant indeed.

Conclusion

After years of runaway gains, the UK housing boom appears to be over. Rapid mortgage rate rises have crashed affordability leading to early signs of distressed selling. Leading indicators point to a sharp acceleration in price declines over 2024 as rate reset schedules peak and real incomes remain pressured. While forecasts are uncertain, a 2006 to 2009-style correction of 15% to 20% no longer appears implausible. All eyes are now on policymakers for measures to try and soften the looming housing downturn.

Key Takeaways

• UK house prices fell 2.1% in November 2023 – first annual decline since the 2008 financial crisis

• Mortgage rates have spiked from 1% to over 4% in just a few years due to soaring Bank of England policy rates

• This has drastically reduced housing affordability and put household budgets under strain

• Falling transaction volumes and price index lags likely understate true market declines so far

• Leading indicators like rising arrears and falling approvals point to further sharp price drops

• Peak of mortgage rate reset schedule over 2024 will drive more distressed selling

• Real incomes still falling adding extra headwind for housing market

• Total peak-to-trough decline of 15-20% now appears possible over the next 1-2 years

• All eyes on policymakers to cushion extent of coming housing downturn