House prices are falling in the UK. According to Nationwide House Price Index, UK house prices just experienced their most significant annual decline since 2009. The Nationwide index reported in August 2023 shows the average property price dropping by 5.3% compared to the same period the previous year.
This decline was more severe than the 3.8% contraction observed in July. Additionally, there was a 0.8% decrease in house prices between July and August, bringing the average property sold price to £259,153, down from the peak of £274,000 in August the previous year. All of which demonstrates that house price falls are picking up pace. That means that sold prices are down by £15,000 since the peak.
Halifax has also reported that the average house price fell by 4.6% in August. That’s the fasted pace fall in 14 years. Between the two house prices indexes, the consensus is that house prices have fallen by around 5%. There is no question that house prices have dropped in the UK. In this article, I want to show you 5 key reasons which show house price falls are accelerating in the UK.
Disclaimer: This is not financial advice and you are responsible for your own financial decisions. I am not a mortgage broker or advisor and I don’t give financial advice! Please consult professional advice before making any kind of mortgage decision.
Why Are House Prices Falling In The UK?
The increase in borrowing costs, driven by higher interest rates, was identified as a key factor affecting the housing market. There is a strong connection between house price falls in the UK and interest rates. Mortgage provider Nationwide reported that the rise in interest rates had resulted in housing market activity falling well below pre-pandemic levels. Mortgage approvals also decreased by nearly 10% between June and July, and the average mortgage rate reached its highest level since 2008.
The Bank of England’s efforts to combat persistent inflation included raising interest rates 14 consecutive times, reaching 5.25% from a record low of 0.1% in November 2021. Market expectations indicated further rate increases at the next meeting in September. This will only steepen house price falls in the UK. Which is pretty much what I said in December 2022, when I sad 2023 would bring about a monumental crash.
The higher interest rates posed challenges for first-time buyers and existing homeowners looking to refinance, affecting mortgage affordability. Those who had previously secured cheap fixed-rate mortgages in 2021 now faced significantly higher repayment levels, potentially straining disposable household incomes. This will drive further house price falls in the UK in 2023 and 2024.
Read: Expert Insight: UK Housing Market To Crash – Here’s What You Need To Know
#1 Buyer Demand Has Decreased by 34%
Decreased Buyer Demand: In the past four weeks, buyer demand has dropped by 34% compared to the average of the last five years, resulting in a 20% decrease in property sales. This is because of a number of reasons according to Zoopla:
- Lower Pressure on Prices: Reduced demand has eased pressure on property prices, leading to slower growth or even price falls, particularly in the South of England.
- High Mortgage Rates: Mortgage rates exceeding 5% are a significant factor influencing house prices. These rates have reduced demand from key buyer groups.
- Homeowners Holding Back: Homeowners with mortgages, who typically represent a third of property sales annually, are delaying purchases, waiting for mortgage rates to decrease before entering the market.
- Challenges for First-Time Buyers: First-time buyers, accounting for another third of sales, are primarily renters. Historically, mortgage payments have been more affordable than renting, but for the first time in 13 years, renting has become cheaper than monthly mortgage repayments. This is discouraging first-time buyers and impacting prices at the lower end of the market.
- Stricter Requirements for Landlords: Landlords who rely on mortgages, constituting about 8% of property sales, now require higher equity, particularly in the South of England (around 40-50%). These stricter requirements are reducing demand from property investors.
- Cash Buyers Alone Not Enough: Cash buyers, unaffected by mortgage rate increases, are the only group not significantly impacted. However, their continued demand alone is insufficient to drive widespread house price growth.
#2 Mortgage Approvals Fall By Almost 10% In A Month
Property economists predicted that with mortgage rates expected to remain between 5.5% and 6% for the next year, along with a less tight supply of second-hand properties on the market, house prices were likely to continue dropping significantly in the coming months.
UK mortgage approvals declined more than expected in July, falling by almost 10% from June to 49,400, according to the Bank of England. The drop in mortgage approvals was primarily attributed to higher borrowing costs, with the average interest rate on new mortgages reaching 4.66%, the highest since 2008. Additionally, interest rates on credit cards reached a new record high of 20.76% in July.
This means that there is more pressure on household finances, with any savings being quickly eroded. Experts expect the Bank of England to maintain high interest rates until the second half of 2024, potentially leading to weaker economic activity and lending in the near term. Reduced mortgage approvals, translates into reduced demand for properties due to affordability. This ultimately leads to higher supply than demand, which means house prices will continue falling in the UK.
#3 Mortgage Arrears Hit 7 Year High
UK residential mortgages in arrears have reached a seven-year high, totalling £16.9 billion in the second quarter of 2023, marking a 28.8% increase from the previous year. This is due to rising mortgage rates following consecutive interest rate hikes by the Bank of England. Despite the increase, arrears remain lower than during the 2008-09 financial crisis.
Mortgage loans have experienced their largest-ever fall, decreasing by £19.9 billion or 1.2%. Experts warn that the impact of higher interest rates may become more pronounced as more mortgage holders transition to higher rates. Additionally, buy-to-let mortgage advances have declined, possibly due to stricter tax laws and concerns of a property market downturn.
The value of outstanding mortgage balances in arrears (by at least 1.5% of the outstanding mortgage balance) increased by 13.0% over just the quarter. You can see from the below chart, the scale of this mortgage arrears acceleration. This will only worsen as more mortgage holder’s fixed rates expire. This will result in a significant number of motivated sellers, and cause further house prices falls in the UK.
#4 The Great Downsizing Is Well Underway
These motivated sellers will very likely seek smaller properties to offset increased mortgage costs. Nationwide’s analysis also revealed that buyers were turning to smaller, more affordable properties, with a smaller decline in transactions for flats compared to 2019. This trend was attributed to the conclusion of the Help to Buy scheme, which aided those with smaller deposits in purchasing newly built homes. Flats had remained relatively more affordable, with average prices rising by only 13% since the pandemic’s onset, compared to a 23% increase for detached properties.
Halifax have also stated that first-time buyers are switching to smaller homes. However, there is likely to be competition from older generations looking to downsize to smaller homes also. Either to cash in on property values, battle mortgage rate rises, or fight the cost of living.
The push to downsize will increase the supply of properties on the market, at a time when buyers are scarce. However, the fact that proportionately more larger homes are being sold, may skew the average house price. Thus limiting the house price falls we see in the Halifax and Nationwide House Price indices.
#5 The RICS property Survey: “Ongoing fall in national house prices gains momentum”
The August 2023 RICS UK Residential Market Survey reveals a challenging housing market. High mortgage rates are pressuring sales activity and prices, with a net balance of -47% reporting a decline in enquiries and agreed sales. The average time to finalize a sale has increased to about 20 weeks. New instructions for sales are down significantly.
House prices are on a downward trend, with a net balance of -68% in August, the worst reading since 2009. Near-term price expectations indicate further declines. In the lettings market, tenant demand is rising (+47% net balance), while new landlord instructions are falling, leading to expectations of higher rental prices (+60% net balance).
In summary, the UK residential market faces declining sales, falling house prices, and a rental market with rising demand and falling supply. There were three take-aways from the RICs Market Survey. All of which are strong indicators that house prices are falling in the UK:
- Activity metrics remain in deeply negative territory
- Ongoing fall in national house prices gains momentum over the month
- Near-term expectations point to little prospect of any turnaround in the immediate future.
House Prices Are Falling: What Now?
In an evolving financial landscape, where housing, once considered a steadfast store of value, is experiencing a noticeable decline in prices, it’s prudent for investors to rethink their asset allocation strategies. The diminishing allure of real estate as a reliable wealth preserver highlights the need to diversify into alternative avenues.
A compelling choice in this scenario is to explore the world of stocks and shares, particularly through Exchange-Traded Funds (ETFs). ETFs offer a versatile and diversified means of entering the stock market, spreading risk across a multitude of industries and sectors.
As housing’s role as an unwavering store of value wanes, ETFs can provide a pathway for investors to potentially capitalize on the resilience and growth of the broader economy. ETFs can help you grow your money, or generate an income from it. Here are some options to help you get started:
- 8 Index Funds That Make My Shortlist
- 5 UK Funds For A Balanced Investment Portfolio
- 5 Defensive Focused Retirement Style Funds
- High Dividend Yield Funds: 8 Funds That Make My Shortlist
- High Yield Bond Funds: 7 That Make My Personal Shortlist
- Income Funds: 6 That Make My Personal Shortlist
When investing capital is at risk. Adjusting investment strategies to align with the shifting financial landscape is a wise course of action.
Further resources:
- https://www.nationwidehousepriceindex.co.uk/download/gkp3h-xmtx3-64xjb-gyhre-0fhd4
- https://www.halifax.co.uk/media-centre/house-price-index.html
- https://www.zoopla.co.uk/discover/property-news/house-price-index/
- https://www.theguardian.com/money/2023/aug/07/uk-house-prices-drop-again-as-halifax-says-first-time-buyers-are-switching-to-smaller-homes
- August 2023 RICS UK Residential Market Survey
- https://www.theguardian.com/money/2023/aug/30/uk-mortgage-approvals-fall-to-five-month-low-interest-rate-hikes-hit-demand
