Record Low Rates, Record High Prices
Cost of Living & Housing Market Downturns
Regional Transactions
Every week brings new reports of record high house prices despite the soaring cost of living as mortgage rates remain low – for the moment. While last year’s Spring Budget all but guaranteed that 2021 would end with a housing boom, this year’s Spring Statement brought no guarantees for the housing market. However, the lack of support for households in the face of the soaring cost of living is likely to further reinforce the inequalities in the housing market. Renters will struggle most and the threat of a future housing market downturn has increased.
Record Low Rates, Record High Prices
House prices are rising rapidly but they are supported, for the time being, by low mortgage rates. Just today, the Nationwide house price index reported an annual price rise of 14.3% in March, the highest annual growth rate since November 2004. This rapid rise in house prices might be shocking given the events of the last two years but they are consistent with the underlying economic trends – specifically mortgage rates, wages, and excess savings – and the higher levels of demand for home purchases seen since the housing market reopened in summer 2020.
The lack of homes available for sale is undoubtedly contributing to increased competition in the sales market but it is low mortgage rates that have helped drive house price to new highs. The number of homes available for sale has collapsed over the last year as more people than usual compete for new listings that are stuck at levels similar to those seen prior to the pandemic. However, it is record low mortgage rates that have been helping many buyers actually pay more. While quoted mortgage rates have started rising, especially at lower loan-to-value ratios, the average rate on new advances is still near record lows (Fig 1). It is likely that some of the current high levels of activity reflect a rush to buy before rates rise more, with some buyers hoping to complete before their rate offer expires.
For the time being, most people buying or remortgaging are benefitting from lower rates than they were previously on. As Fig 1 shows, the average mortgage rate on new advances was still below the average rate on outstanding mortgages in February. With most recent new mortgage advances on either two or five year fixed rate periods (Fig 2), the majority of those moving or remortgaging will be benefitting from a lower mortgage rate than they were previously on. However, the margins are fine and even a small rise in average mortgage rates (to around 2%) could see this situation reverse.
Meanwhile, first time buyers are still benefiting from the recovery in the higher loan-to-value mortgages and could be a significant driver of current activity levels.
Cost of Living & Housing Market Downturns
The booming housing market amidst the soaring cost of living reflects the inequalities in housing. Inequalities that have already been amplified by the pandemic and are likely to be further reinforced by the rising cost of living. Access to home-ownership is already highly determined by wealth and income, with households at the lower end of the two struggling to raise a sufficient deposit or borrow enough to buy. Meanwhile, for those that can afford to buy (or already own), low mortgage rates currently offer a much cheaper cost of housing when compared to renting in most parts of the country. The equity in their homes may even be their best performing financial asset.
For those that have no hope of buying, the rising cost of living heaps further pain on top of the challenges of the last two years. The current state of the rental market, with rapidly rising rents and a lack of homes to choose from, are making it even more challenging. Adding in the rising cost of living and many people – especially lower income renters – are facing difficult decisions about which bills to pay. For example, the Family Resource Survey highlights the differences in food security across housing tenures – whether households have sufficient food to facilitate an active and healthy lifestyle. The survey reports that just 2% of owner occupiers had food insecurity in 2020/21 but 11% of private renting and 22% of social renting households reported being food insecure.
These results and other data on financial stress might suggest the most damaging consequences of the cost of living crisis will be for those in the rental sector. However, the scale of the crisis suggests that although the initial impact might be greatest in areas of the housing market with large proportions of low income renters, it is possible that the crisis begins to feed through to the wider housing market. For example, the rising cost of living (including oil prices) was a key factor in both housing market downturns during the 1970s. While a housing market downturn is far from guaranteed this year, the limited government support for rising household bills ensures that the cost of living crisis is a growing threat to the market.
Regional Transactions
Housing market activity is continuing at higher levels than recorded prior to the pandemic, despite the end of the stamp duty holiday. Although the data is provisional as the Land Reg Lag is still an issue, we have produced our first estimates for regional transactions during 2021. The chart below highlights the spike in activity across all regions in 2021 though it was proportionally largest (when compared to 2019 levels) in London and the south of England. However, the fall in transactions in the five years leading up to the pandemic in London means that transactions in the capital during 2021 were just 4% higher than the levels recorded in 2014.
Market At A Glance
Economy – UK
The ONS monthly estimates reported GDP was 10% higher in January 2022 than the same month in 2021. This left monthly GDP just 0.3% higher than the pre-pandemic peak recorded in January 2020. However, this data will inevitably be revised in coming months and years.
House Prices - UK
Rightmove reported a 10.4% annual rise in asking house prices in March 2022 while Nationwide reported a 14.3% annual rise in their mortgage approval based index in the same month. Meanwhile, the ONS reported 9.6% annual growth in its sales agreed index in the year to January 2022.
Transactions – UK
HMRC provisionally reported 112,000 residential transactions in February. This was 16% higher than the same month in 2019. The Bank of England reported mortgage approvals for house purchase were 10% higher in February 2022 than the same month in 2019.