Economists warn the UK housing boom has hit its peak and predict increased mortgage competition as soaring property valuations stretch borrowers’ affordability to breaking point.
Research published last week by estate agents Haart suggests house prices are likely to be flat or fall. Haart, which runs around 100 branches, says it sees decreasing demand in the housing market and says UK mortgage approvals fell 8.6 per cent in April.
The Royal Institute of Chartered Surveyors says this is partly due to a rush of investors trying to beat a stamp duty surcharge.
But Haart says reduced economic growth and completely unaffordable house prices are also playing a part.
So what is the trajectory of house prices in the UK? Has the market reached a turning point? And what does this mean for the mortgage market?
Catching up on the slowdown
GPS Economics director Gary Styles also predicts house prices will cool off.
He says: “Some of the estate agents have been slow to catch up on the slowdown. From an economics point of view, that has been slowing down for quite some time. So the general feeling among my fellow economists is that we will see this slowing too.”
Styles predicts house price growth slowing to 2 per cent in 2017 and 2018. A Reuters report predicts house prices slowing to 4 per cent and 3.8 per cent over the same periods.
House prices rose 6.7 per cent in 2015, according to the Office for National Statistics.
Capital Economics chief property economist Ed Stansfield believes that house prices will stagnate for the foreseeable future, driven by affordability pressures on buyers.
He says: “The most likely scenario is house prices go nowhere for the next three or four years. House prices are too high and that can’t make it easy for people to get into the market without assistance. I don’t think, therefore, that there is any scope for them to go higher.”
Some brokers also predict a slowdown in house price growth.
Coreco director Andrew Montlake says: “It’s mainly driven by supply and demand. Overall, Brexit aside, there is still not enough supply of property, so house price growth will still continue, albeit at a much slower rate.”
But John Charcol senior technical director Ray Boulger says house prices will not cool off too much, as mortgage availability is good and mortgage rates are unlikely to rise.
He says: “My original forecast was that house prices would rise 4.5 per cent this year, based on the Nationwide index. I see no reason to really change that.”
A vote to leave Europe could also hit prices. Treasury analysis published last week says that houses could be 10 per cent to 18 per cent lower after a ‘leave’ vote.
Rating agencies S&P and Fitch have also warned of house prices falling following UK independence from Brussels.
Styles says: “That’s a very difficult question to answer in terms of real effects on the numbers.”
Boulger says: “If there is a vote to leave then the only part of the market expect to see adversely affected is the top end of the London market, as it will take two years for anything to happen. But what might change is the outlook from international buyers, who tend to concentrate on the top end of the London market.”
The wider mortgage market will also be hit by any downturn in the housing arena.
Halifax housing economist Martin Ellis says the impact is hard to predict, but that increased competition is likely.
He says: “That’s a very difficult one to call. If you get housing market slowdown then we will see less activity in terms of mortgage approvals, and lending figures will be weaker. That could lead to increased competition as lenders battle for the smaller amount of business that remains.”
Research published last week by estate agent Savills found that buying a property is now 20 per cent more expensive than renting.
The research found that mortgages were around 25 per cent cheaper than renting once the costs of capital repayments in the first year of a mortgage were taken out.
But renting becomes cheaper once first-year capital repayment is taken into account.
During the second half of the year we should see some cooling in house price growth. We have seen some early signs of this over the last couple of months, especially if you look at the quarter-on-quarter change.
That has gone down to 1.5 per cent this month, whereas it was 3 per cent in February and 2.9 per cent in March. Lately we have had a period where house prices have risen much quicker than earnings, for quite a long time, and that has made it difficult for people to afford a home at current prices, which in turn is likely to curb housing demand.
As that happens we would expect that to lead to a slowdown in house price growth. It is always hard to be exact about the timings of that, but there are tentative signs that trend is likely to continue.
Martin Ellis is a housing economist at Halifax