Why the current recovery in the property market is misleading

This spring, the housing market appeared to be on the mend for a short while.

Based on figures from the Bank of England, mortgage approvals increased in February and March.

According to Nationwide's index, house prices increased by 0.4% in April after falling for seven straight months. Sellers' bets on a property market revival led to a 1.8% increase in asking prices in May, according to Rightmove.

Some experts and journalists started to believe that the British real estate market had avoided the much-anticipated fall and was really strengthening.

In April, mortgage permits once again declined, well below what the City was expecting.

After a brief pause, Nationwide reported that the decline in housing prices resumed in May.

In addition, new statistics released on Tuesday revealed that housing construction decreased in May for the sixth consecutive month, reaching its lowest level since the spring of 2020, when the government lockdown nearly halted all construction.

Aside from the pandemic period, housebuilding dropped last month to its lowest point since April 2009, when the financial crisis was severely impacting the industry.

According to data from Nationwide, average costs have dropped by 4.3% thus far, indicating the slump is only getting started.

The Bank of England is now anticipated to raise interest rates as high as 5.5% to stifle price increases in response to last month's unexpectedly strong inflation figures, which caused experts and investors to rethink their predictions for the peak of interest rates.

Lenders have responded by quickly increasing the costs of their mortgage packages.

According to Moneyfacts' average daily quoted rate for a two-year fixed rate mortgage, a buyer taking out a £200,000 house loan will be required to shell out an additional £840 annually as opposed to if they had secured a contract just a week ago.

The average mortgage rate across all deposit amounts is now predicted to rise to 5.76% in April of next year, exceeding the peak of 5.6% reached in October 2022. The usual rate may exceed 6% for those who fix for two years.

Rates are projected to go up due to a forecasted spike in unemployment as well as the greater cost of wholesale borrowing brought on by Bank of England rises.

Higher interest rates will put additional financial strain on businesses, which is likely to result in more layoffs throughout the economy. 

Increased financing from the so-called "Bank of Mother and Father" and an increase in buyers spacing out their repayments over a longer duration might somewhat counteract the effects of higher rates. Currently, first-time buyers are in record-high demand for 35-year mortgages.

Even if interest rates at some point start to decline, it's highly doubtful that they will return to the extremely low levels they were in the ten years before the pandemic. The real estate market will need time to adjust to rates that stabilise at a significantly higher level.

Moreover…

The volume of transactions in the larger housing market has a direct impact on the construction of new homes. Builders cut back if sales decline because they are unsure if they will be able to sell.

According to David Hickman, a surveyor in the South West, the new construction industry is already feeling the effects of the downturn the most.

Prior to starting to rebound during the financial crisis, housing values declined for 17 straight months.

House construction, though, was going backwards for a much longer. In 2008, new home starts plummeted, and it took another six years for them to regain pre-crash levels.

Because this downturn has not been caused by the same type of financial market bubble bust, Hudson predicts that the current housing slump will be shorter. Still, he asserts, the decline in completions will outlive any further price declines.

(Sources: telegraph.co.uk, moneyfactsgroup.co.uk, nationwide.co.uk)