UK Housing Downturn Moves Into New Phase With Prices Falling Even Faster

After a summer of bad news and more interest-rate hikes, the toll on the UK housing market is mounting.

(Bloomberg) — After a summer of bad news and more interest-rate hikes, the toll on the UK housing market is mounting.

Demand is under pressure, sales are weakening and transactions are on track for their worst year in more than a decade. As the dominoes fall, that’s feeding through to the part of the market that gets the most attention — prices. Sellers are cutting what they’re asking for, and lender Halifax said Thursday that values are declining at the fastest pace in 14 years, when the global financial crisis was raging.

The big weight on the market is exorbitant mortgage costs as the Bank of England keeps raising rates to cool inflation. That’s shutting the door to potential buyers, locking them out of the market. Plus, thousands of existing borrowers who have, or are about to, come off cheap fixed-rate loan deals, are getting punished with a huge jump in their interest bills.

“There is always a lag-effect where rate increases are concerned, and we may now be seeing a greater impact from higher mortgage costs flowing through to house prices,” said Kim Kinnaird, director of mortgages at Halifax.

Its report showed prices fell almost 2% in August from July, and were down 4.6% year-on-year. Nationwide Building Society last week put the annual decline that month at 5.3%.

Forecasters have been predicting that prices will drop about 10% from their 2022 peak. The latest figures put the market just over half way there, meaning the grind lower is likely to run through the end of the year and into 2024.

First-time buyers are being hit the hardest by soaring rates, with mortgage repayments now accounting for over 40% of take-home pay compared with the long-term average of about 29%, according to Bloomberg Economics. It’s only been higher during the 2008 crash and the 1990s recession.

The average two-year fixed-rate mortgage is about 6.7%, compared with 4.33% a year ago, according to Moneyfacts Group Plc. It was below 2% in late 2021, before the BOE began jacking up rates. Meanwhile, home loan approvals are down almost 30% on average this year.

“It looks increasingly likely that mortgage rates will remain at or above 5% rather than falling lower over the rest of 2023,” said Richard Donnell, executive director at property portal Zoopla. “This will reduce demand and buying power and keep prices tracking steadily lower.”

There have also been warnings from UK builders. Crest Nicholson Holdings Plc said its sales rate has been about half of what it anticipated.

Just this week, Barratt Developments Plc, the UK’s largest builder by market value, reported that its measure of sales plunged over the summer compared with the previous financial year. According to Chief Executive David Thomas, customers are up against “cost of living and mortgage affordability challenges.”

“Buyers and sellers knew interest rates would rise after 14 years, they just didn’t expect it to feel like being strapped into a roller-coaster,” said Tom Bill, head of UK residential research at broker Knight Frank. 

Rate Hikes

The BOE has already increased its benchmark rate to 5.25%, It’s forecast to raise again this month, though that may be the last move. Governor Andrew Bailey said Wednesday that rates are “much nearer to the top of the cycle.” 

With well over 50,000 two-year fixed-rate mortgages due to expire this month, and thousands more to come through the end of the year, those looking for new deals will be trying to figure out how they pay their higher bills. The big risk is that some can’t, particularly given the cost-of-living crisis, and are forced to sell, exacerbating the price slump.

Still, there’s been little sign of that so far. Unemployment remains very low and wage growth has picked up, somewhat easing the cost-of-living squeeze. As long as that doesn’t change, the downside may be limited. 

And even if prices were to fall 10% from here, they would still be higher than their pre-pandemic level. Values got a lift in 2021 thanks to a temporary tax cut by the government to support property demand.

“It is hard to get a big repricing without more stress in the system, i.e. forced sellers who have to sell for financial or other reasons and have to accept the market clearing price for their home,” said Donnell. “We would need to see a weakening in the labor market for this to happen.”

The housing turbulence is striking pockets of the market at different speeds. Cheaper properties in northern England and Scotland are holding up better than southern England, where higher prices require heftier borrowing. Such a pattern would echo previous slumps, which began in London before spreading from there.

“The impact will not be one size fits all,” said Lucian Cook, head of residential research at broker Savills Plc. “We expect to see a continued distinction between different parts of the market, depending on the extent to which they are reliant on debt or affected by buy-to let landlords bringing stock to the market.”

The prevalence of fixed-term mortgages has also slowed the impact of BOE tightening as it takes time for higher interest rates to filter through to borrowers.

The average rate paid on the total outstanding stock of mortgages, known as the ‘effective rate’, was less than 3% in July, up from 2% when the Bank of England started its hiking cycle.

“We don’t expect a cliff-edge moment for prices but a single-digit decline this year is likely to be repeated next year,” Knight Frank’s Bill said. “The key moment will come when there is more certainty that the current cycle of rate hikes is at an end.”

More stories like this are available on

©2023 Bloomberg L.P.