Michael Gove savaged over housing pledges
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New research by analysis firm Capital Economics suggests that in the next two years house prices across the country will slump by around 7 percent – wiping out any expected growth in the market from this year. However, areas with the most expensive properties will fare the worst in the contraction, with unaffordability becoming a key concern for potential buyers.
At the start of the month, the Bank of England raised its base interest rate to 1.75 percent – the sixth consecutive rise since dropping it to a record low of 0.1 percent during the pandemic. Economists are anticipating this will be raised by a further 0.5 percent in September.
The interest rate rises are an attempt to stem spiralling inflation – which climbed to over 10 percent in July, and could reach as high as 18.6 percent in January – putting immense pressure on the cost of living, but are also likely to send mortgage interests higher, deterring house-hunters.
With household income shrinking in real terms, and costs and mortgage prices rising, the current high number of property buyers will likely decline sharply. House prices “now appear to be stalling”, according to Capital Economics.
The UK still faces a housing crisis, the demand from which has seen prices increase by 60 percent in the last decade.
But growth in the London housing market – where prices are usually double the average for the rest of the UK – is slowest, suggesting affordability is a key limit on the housing market.
The value of properties in the capital is expected to fall dramatically by 12 percent by the end of 2024 – 8 percent next year and a further 4 percent the following year, according to Capital Economics figures.
It means that a property with an average London price of £538,000 will lose around £65,560 in value in that period.
House prices in the capital will fare the worst due to their size in relation to average earnings – around £70,000 for London, according to the Average Salary Survey – meaning buyers are more reliant on mortgages to make up the difference.
With interest rates rising on mortgages as inflation soars, many people will find mortgages on expensive properties increasingly unaffordable themselves, leading to a decline in demand.
Experts fear that a key crunch point will come when mortgages have to be refinanced – usually within two to five years – which are likely to see repayments increase.
The south east of England – the second priciest area for property – will see values fall by 9 percent by 2024, amounting to an average £35,190 drop.
Meanwhile, the south west and east of England will each suffer price falls of around 6.5 percent in the same amount of time.
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Andrew Wishart, a senior property economist at Capital Economics, commented: “Areas where house prices are highest relative to incomes are most vulnerable.
“London and the South East are therefore likely to see the largest falls and the North and Wales the smallest.”
The Midlands, Scotland and Northern Ireland are expected to see house prices fall by 5 percent, while Yorkshire and the Humber and the north west of England will see property value drop by 4 percent.
Houses in Wales will see a 3.5 percent fall in price over the next two years, while the north east of England will see the smallest fall out of all the regions of Britain, of 3 percent.
The rise in mortgage costs is being seen as the key driver of this downward trend, as it is likely to prevent first time buyers getting on the housing ladder and pre-existing homeowners moving house.
Mr Wishart said that the slump in demand and confidence in the market will even “prevent cash buyers taking up the slack”, with market activity expected to slow to its lowest level in 2023.
Experts differ on whether there will be a sudden correction in the housing market – i.e. a crash – or a slow decline over the coming months and years.
The Bank of England previously predicted house price growth will slow, and in July, Wesley Davidson, founder of mortgage broker Fox Davidson, predicted the average house price will drop by 10 percent in the next 12 months.
Mr Wishart said: “Signs that the pandemic house price boom has run out of steam before valuations become wildly overstretched should limit the size of the coming correction.”
However, he noted that larger rises in mortgage rates and long-term, wider economic troubles were “risks”, and that quarterly house price growth will “ease sharply” by the end of this year.
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