The UK property market boom might soon be over as experts predict that the cost-of-living crisis and rising interest rates could cause a house price correction.
Currently the market is overheated, with property prices having increased by an average of over 10% over a year. This makes it increasingly difficult for first-time buyers to get a foot on the property ladder.
However, some figures from August show prices have dipped slightly over the year, indicating a possible slowdown in the market.
The average price of a UK home has nearly trebled since the turn of the century. Prices have increased by more than 60% over the last ten years, according to Nationwide building society.
On the surface, it looks like the main long-term driver has been simple supply and demand: a shortage of housing stock and high demand for properties.
While this is certainly a factor, low interest rates have really been powering the housing market. The ability to borrow cheaply makes it easier for people to afford mortgages.
However, since December 2021 the Bank of England has increased the base rate six times from its record low of 0.1% in response to soaring inflation, which reached a 40-year high in July 2022. The rate now sits at 1.75%.
But it’s still relatively cheap to borrow money to buy a home, especially for those with big deposits, so the housing market hasn’t seen a big impact yet.
Further rate rises are expected throughout 2022, which could dampen the housing market because it means mortgage repayments will increase.
The cost-of-living crisis is likely to be the biggest cause of a slowdown in the housing market. As household budgets come under pressure, fewer people can afford to stretch themselves to buy homes.
It’s thought that some first-time buyers will hold off as they wait to see what happens which could have an impact on the market.
Growth in average house prices in the UK has been soaring for the past two years. In fact, the average house price has increased by almost £50,000 since August 2020, according to Nationwide building society.
Nevertheless, some data has indicated that the rate of growth is slowing down. According to the Rightmove house price index, there was a 1.3% dip in the average house price between July and August 2022. Yet over the year house prices climbed by 8%.
The most recent figures from Halifax found that the average house price increased by just 0.4% from July to August, after decreasing by 0.1% the previous month, though annual growth still sits at 11.5%.
This reflects a significant drop from earlier this year, with March seeing a monthly increase in house prices of 1.1%, following a 1.7% rise in February.
Figures from Nationwide paint a more positive picture after showing an increase of 10% in the year to August 2022. Over the month this was a 0.8% increase, up from the 0.5% growth reported in July.
This means the average price of a house in the UK is now £273,751. That’s still more than a fifth higher than at the start of the pandemic.
Nationwide, Halifax and Rightmove differ in their house price estimates because the representative properties they track are slightly different.
With working from home likely to be a more permanent part of many people’s lives, demand for properties outside cities has jumped.
Lockdowns highlighted the value of greenery and space, triggering a surge of interest in properties in rural and coastal areas, according to ONS statistics.
House prices in some hotspots have risen at three times the national rate. These include places like:
While we can’t say for sure what the future holds for the UK housing market, but a crash seems very unlikely. There is still plenty of demand and a short supply of houses, which continues to push up prices.
However, there are a few factors that could put a dampener on the extreme growth seen in recent years, namely the cost-of-living crisis. Record petrol and energy prices, rising inflation and tax rises mean most households have less disposable income to spend on buying houses.
While annual house price growth remains high across the board, some data has already shown house prices falling slightly month on month. If demand slows down and people have smaller deposits, the rate of house price growth could fall further.
So while a crash seems unlikely, the squeeze on household finances as a result of the cost of living crisis means we could see house price growth continue to slow throughout the remainder of the year. Prices may even fall slightly, as some data has shown them to have already.
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