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It’s a tale of two markets: while private rents have hit record highs in the UK, making life precarious for tenants, the for-sale sector has slowed sharply and property values are falling, with sharp declines forecast for next year. is
The latest house price index from Britain’s biggest building society, Nationwide, together with mortgage lending data from the Bank of England this week, should shed further light on the severity of the UK’s housing slump.
The market was cooling, and mortgage rates were rising, before the Truss government’s disastrous mini-budget brought the pandemic-era housing boom to an abrupt halt.
Mortgage rates have soared above 6%, a level last seen in 2008, adding hundreds of pounds to mortgage payments and reducing demand. Surprisingly, October’s nationwide figures showed the first monthly drop in house prices in 15 months: at 0.9%, it was the biggest drop since June 2020.
Expensive mortgages have put off many first-time buyers, who are now renting in the hope that rates will drop in the New Year – causing fierce competition in the rental market, according to property site RightMove.
But that is not the only explanation for the rise in rental costs. Andrew Wishart of Capital Economics says tenants who work from home, if they can afford it, prefer to live alone rather than live in a cramped home share. The number of people renting a property alone increased by 530,000 in 2020-21, while the number of people renting in households of three or more fell by 2 million.
Wishart suggests that cost of living pressures may somewhat reverse this trend. “But with the average tenancy lasting four years, that’s not going to happen overnight,” he says, adding that over the next few years landlords will face serious financial pressure to buy and many may sell, reducing supply.
Due to the lack of rent, unsurprisingly, the amount that tenants are willing to pay has increased. London estate agent Foxtons has reported a 22% year-on-year rise in rents in the capital in the first nine months of 2022. The average rent has hit a new high of £571 a week – almost £100 more than it started. year.
A record number of new renters registered in the third quarter: 30 for every property listed, around three times the recent level. At the same time, supply has fallen: new notices to London landlords fell by 18% in the first nine months compared with a year ago.
Foxton’s describes the state of London’s rental market as “phenomenal”, adding that “the impact of post-Covid returns in the city has been intense”.
Supply problems have been exacerbated by overseas student renters and corporate lets and 11% of landlords opting to sell their property at the end of their tenancy this year.
Advertising rents have also risen further in several other cities and towns, according to research published last month by Rightmove. These include Newbury, Manchester and Cardiff, all of which have seen annual increases of 20% or more. Rents are expected to rise even further next year, while home prices will go the other way, with many experts predicting a decline of between 5% and 12%.
Capital Economics is predicting that housing transactions will fall to their lowest level for a decade in 2023 and that median home prices will fall 12%. Rightmove estimates a smaller drop of up to 5%, while property firm JLL is predicting a 6% drop.
Meanwhile interest rates are still on an upward path, with the Bank of England forecast to raise them by another half point to 3.5% in mid-December. Rates are expected to peak at 4.25% next spring, lower than once feared.
“Although mortgage rates are likely to fall to 4% by 2024, we suspect that house prices will have to fall by 12% before demand recovers and affordability improves to bottom out,” says Wishart.
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