House prices in the United Kingdom could plummet by as much as 15% if the country presses ahead with its tax-slashing economic gamble.
(AMJL) said on Tuesday that UK house prices could “easily” fall between 10% and 15% over the next 18 months if the Bank of England aggressively hikes interest rates to keep inflation in check.
“Once all the rate rises feed through, mortgage debt affordability deteriorates to the same level as the pre [global financial crisis] peak,” Credit Suisse research analysts wrote.
UK finance minister Kwasi Kwarteng last week announced the biggest set of tax cuts in 50 years and a massive increase in government borrowing. The news sent the value of the pound plunging to a record low against the US dollar and UK government bond prices crashing.
Some analysts now expect the Bank of England to raise interest rates to 6% next year, up from its current 2.25%, to prop up the ailing currency. The central bank announced emergency bond buying on Wednesday to try to restore market calm.
The fallout could make it harder for people to get approved for mortgages, and encourage prospective buyers to delay their purchases. A drop in demand would lead to falling prices.
Since Friday, several lenders have withdrawn hundreds of mortgage products in response to the turmoil.
Capital Economics, which likewise forecasts a drop in house prices of between 10% and 15%, warned the slump could be “devastating.”
“The resulting drop in buying power makes a significant drop in house prices inevitable,” Andrew Wishart, senior economist at Capital Economics, said in a research note on Tuesday.
Wishart said that a 6% interest rate would reduce the maximum mortgage a typical first-time buyer with an annual income of £55,000 ($59,000) could secure by 26% to £203,000 ($217,000).
“A surge in UK home values over the pandemic and the rise of mortgage rates means we face a sizable hit to household buying power over the rest of 2022 and into 2023,” Richard Donnell, executive director at Zoopla, a real estate provider, told CNN Business on Wednesday.
That’s a wider problem for the economy given that 36% of household wealth is held in property, data from the Office for National Statistics shows.
Millions of mortgage borrowers are steeling themselves for a nasty hike to their monthly payments as a result of higher-than-expected interest rates, which were already forecast to rise over the coming months.
At a 6% base rate, a person refinancing a 20-year fixed-rate mortgage of £146,000 ($157,000) — the average outstanding balance on a residential mortgage in the UK — can expect to pay an extra £309 ($333) per month, Laura Suter, head of personal finance at AJ Bell, told CNN Business on Tuesday.
That’s £108 ($116) more than the investment firm estimated before this week’s market crash.
About 1.8 million people are due to refinance next year, according to the Resolution Foundation.
Samuel Tombs, chief economist at Pantheon Macroeconomics, said in a Tuesday report that sharp increases to monthly payments could spark a wave of mortgage defaults, with consequences for the country’s banking sector.
“Mortgage arrears and default would rise just as house prices likely would be tumbling, placing huge strain on banks’ balance sheets,” Tombs said.
There is a sense among agents and other property professionals that this could hit demand in some parts of the market but also provide some added urgency to get deals through at the current mortgage rates.
Adrian Anderson, director of property finance specialists Anderson Harris, said the rate increase would provide a reality check for borrowers and property buyers.
He said: “Experts are anticipating more large rate hikes later in the year and into 2023 which is going to heap misery on mortgage payers and have a severe impact on households’ disposable income.
“The message to mortgage borrowers is very simple – don’t wait, take action now as its likely the situation will get worse in the short term. Borrowers are actively shopping around and seeking to fix their mortgage payments now before the monthly mortgage pain gets even worse.
“This is a huge reality check. The landscape has changed quickly, we are no longer living in a period of ultra-low interest rates with plenty of disposable income; our outgoings are increasing faster than our income and we are going to have to adjust quickly and get used to the new norm.”
Lucian Cook, head of residential research at Savills, said that while the increase is lower than some had speculated, nobody is ruling out further hikes.
He added: “While this will bring an added sense of caution to the market and reduce mortgage affordability, the relaxation of mortgage regulations we saw in August means fewer limits in terms of what buyers can borrow.
“We’d expect that to lead to a softening of demand after two bumper years, and a reduction in budgets, leading to lower levels of transactions and a softening of prices, particularly in the heavily mortgage-dependent parts of the market.
“However, there will be a distinction between those more or less dependent on borrowing, with greater segmentation between different price bands.
“The most recent survey of over 1,000 people registered with Savills, suggested that the majority of prime market buyers had not adjusted their budgets. Almost a third (29%) of buyers said they had reduced what they planned to spend.”
Nick Leeming, chairman of Jackson-Stops, suggested there may be a re-evaluation of budgets among borrowers.
He said: “Inevitably, those who aren’t yet on the ladder and who don’t have a capital asset to benefit from are always hardest hit by such announcements, and it may cause those at the lower end of the market to revaluate their budgets.
“This shift in monetary policy is also adding a sense of urgency to current transactions, as mortgage providers cope with a backlog of applications, but its effect on property values won’t be fully reflected in the price indices for several months to come.”
Commentators are still confident that demand will remain high though and the rise may even help with new listings.
Rightmove’s property expert, Tim Bannister said that despite interest rates rising, demand in both the first-time buyer sector and overall market is still up on the longer-term pre-pandemic average, signalling that many are already adapting to changing rates in their plans and getting on with moves.
He added: “Even with a seventh consecutive rise this takes average lender rates back towards where they were as recently as 2012-2014.
“The indication is that rates are set to rise even further into 2023. This sense that it’s going to become more expensive to borrow means that those thinking of buying for the first time may rush to fix now before rates rise further.”
Jeremy leaf, north London estate agent and a former RICS residential chairman, added: “From our experience on the ground, the impact of the interest rate rise will be felt most with regard to confidence to move and take on debt.
“The increase will impact first-time buyers and new borrowers particularly, bearing in mind approximately 80% of borrowers are on fixed rates.
“However, with UK Finance forecasting that 1.8m deals are due to end at some point next year, there will be plenty of borrowers looking for new mortgage deals at a time when rates are likely to be considerably higher.
‘Although rates are still low compared with their historical average, the impact is exacerbated by continuing worries about inflation and the economy generally.
“The longer the climate of higher interest rates persists, the more likely it is that people will consider selling, leading to a softening in prices. However, it is worth remembering that around 50% of homeowners are not dependent on mortgage finance at all so will be unaffected.”
Over the duration of a two-year fix, they would spend an extra £21,432 compared to if they had locked in a mortgage deal a year earlier – and traders expect rates will continue to rise even higher. The consensus from economists, however, is for a less extreme peak in the Bank Rate of around 3.5pc in 2023.
Pantheon Macroeconomics, an analyst, has forecast only a 0.5 percentage point increase on Thursday. But analysts have warned that transactions will still drop sharply. Soaring mortgage rates are already taking a heavy toll on buyer demand, as purchasers have less money to spend.
In August, new buyer inquiries plunged at the fastest rate recorded since April 2020, when the housing market was shut down during the first lockdown, according to the Royal Institution of Chartered Surveyors, a professional body.
Excluding the 2020 data, August saw the biggest drop in buyer inquiries since the global financial crisis – and that was before Thursday’s rate rise.
Ross Boyd, of Dashly, a mortgage comparison website, said: “A rate increase of 0.75 percentage points will send shockwaves through the property market. Factor in the impact of skyrocketing inflation and an economy that’s teetering on the edge, and you have all the ingredients for a serious slowdown in transaction levels.”
First-time buyers, who have been unable to benefit from high house price growth, will be hardest hit. A 0.75 point increase in the Bank Rate would push up the monthly mortgage bill on a typical £243,700 first-time buyer home from £1,148 in August to £1,240 – an extra £92, or £2,208 over two years, according to Hamptons.
This would mean first-time buyer mortgage costs would have increased by 34pc since December. If the Bank Rate hits 3.75pc, the average first-time buyer’s monthly mortgage bill will be £1,402 – an extra £478 per month compared to if they had got a mortgage offer in December. Hamptons’ calculations were for a buyer with a 25pc deposit, purchasing with a two-year fixed-rate mortgage.
“The impact on me has been anxiety, because you put your life plans on hold,” he said. “You’re worried about having this potentially worthless asset that, in this case, I saved up quite long and hard for in order to be able to buy.”
He said he now regretted signing up to the shared ownership scheme, which had been marketed as an affordable way to get on the property ladder. It was the only way he would have been able to afford to buy at the time, he said.
“I absolutely want to have nothing to do with that flat or any shared ownership schemes in the future,” he added.
‘I can no longer afford childcare’
Nicola Oldcroft, 36, also used shared ownership when she bought her first flat in London in 2016; she paid £110,000 for a 30pc share of the property. The purchase had come at an emotional time: she was able to afford it only because she had been severely assaulted and managed to get some compensation in court.
When her partner moved in, they managed to increase their ownership share to 100pc. They are also on a standard variable rate mortgage and their payments have gone from £922 a month in March last year to £1,410 now.
Ms Oldcroft, a bereavement counsellor, has been unable to get a fixed deal owing to the cladding on the building, which she found out about only after she had bought the flat. She and her partner have two children, aged one and three, and they have been desperate to sell the flat but are unable to do so until the cladding is removed.
The figures illustrate how people are increasingly having to stretch themselves to get on the ladder in the face of rising interest rates and mortgage costs.
Separate figures show couples are now stretching themselves more than ever before to get on the housing ladder.
Data published by the Financial Conduct Authority show the proportion of “high” loan to income loans – defined as more than three times income for joint borrowers – stood at 39.2pc of all mortgage lending in the second quarter of this year.
This is the highest proportion since at least 2007, and compares to 20pc before the financial crisis.
Bank policymakers are expected to raise interest rates by at least half a percentage point next week, as officials battle to get a grip on rampant inflation.
Andrew Bailey, the Governor, and the other eight members of the Monetary Policy Committee (MPC) were expected to meet this week, but delayed their decision on interest rates following the death of Queen Elizabeth II.
It began raising interest rates in December, and next week’s move is set to take borrowing costs to at least 2.25pc, the highest level since 2008.
Banks and building societies have passed this on to homeowners with variable rate mortgages, and to those who are taking out new fixed-rate loans.
The average five-year fixed rate mortgage taken out by buyers with a 75pc deposit came with an interest rate of 3.6pc last month.
That is more than double the 1.4pc typically charged a year earlier, Bank figures show.
First time buyers with a smaller deposit pay even more. The typical two-year fix for a buyer with a 10pc deposit costs 3.9pc, up from 2.5pc 12 months ago.
The average property sold for £292,118 in July, according to the Office for National Statistics, a record high.
This is up 15.5pc compared with July of 2021, marking a record jump. This is in part because much of the stamp duty holiday offered during the pandemic came to an end in June 2021, briefly pushing prices down again last summer after a frenzy to beat the deadline.
But prices are still up by 12pc compared to last August, and 10pc compared to June 2021, the final month of the stamp duty break, illustrating the scale of the boom in the market even after the tax break was wound down.
Wagh said government’s investment in infrastructure, increasing consumption in the country and robust growth in end-use sectors like e-commerce could outweigh headwinds such as high inflation and increased interest rates.
Also, he said the rising freight rates and fleet utilisation are continuously increasing the transporter confidence index.
“The actual demand is going to be a net factor of the headwinds and tailwinds, within which the inflation, interest rates remain kind of headwinds,” he told PTI.
“It does appear that the tailwinds and headwinds together should lead to good double-digit growth in the industry this year. We should expect a double-digit growth in the CV industry during this year,” Wagh said.
In the first quarter of 2022-23, domestic CV sales grew 112 per cent at 2,24,512 units as against 1,05,800 units in the year-ago period. In 2021-22 it grew by 26 per cent at 7,16,566 units as compared to 5,68,559 units in 2020-21, according to Society of Indian Automobile Manufacturers (SIAM),
On impact of rising interest rates, Wagh said, “Interest rates do have a fair bit of impact on the EMIs of a vehicle… Of late with the interest rates increasing no doubt, the EMIs will go up.”
However, he said the industry has worked with financial institutions to provide such financing solutions that there is not much increase in the EMIs.
“When we moved from BS IV to VI, and also later on due to (vehicle) price increases as a result of the commodity price increase, it was leading to an increase in EMI of the vehicle but we worked with financial institutions. They’ve come up with schemes which showed that the EMI still remained similar to what it was in the pre BS-VI era, more or less,” Wagh said.
In August, the Reserve Bank of India (RBI) had raised the key interest rate by 50 basis points. This was the third consecutive increase since May, effectively bringing interest rate to the pre-pandemic level.
Asked about the outlook for Tata Motors, he said the company’s focus would remain on profitable growth, although it sees demand picking up in the second half of the fiscal.
“We’ve just gone through the rainy season and now the festive season will start. So the demand will start picking up like it happens every year from the second half of August and September. That’s what we are expecting. In fact, last year also from September the demand picked up pretty well,” he added.
With PTI Inputs
Like hundreds of thousands of other Australians, Madeline and Jacqueline Darkovska are prisoners to their mortgage.
The 24-year-old twin sisters are among borrowers who purchased at the height of the pandemic housing boom and are finding it impossible to refinance their home loan.
And with another double interest rate hike expected on Tuesday, the sisters — who are already struggling to meet higher mortgage repayments — fear they could lose their home in the coming months.
“We’ve been struggling a lot,” says Madeline, who had been working casual shifts as a clerk for a Perth hospital before losing her job and having to call on her mother, Val, to help her make the required mortgage repayments.
“I haven’t been able to afford a lot of things, based on lack of basic living, haven’t been able to purchase a lot of food for myself or even help pay for my car bill, mortgage, everything,” she tells ABC News.
As banks impose tougher lending standards and interest rate hikes drive property prices down, more Australians will find themselves in a mortgage trap, unable to refinance because no lender wants to take on the risk.
Late last year, the nation’s banking regulator, the Australian Prudential Regulation Authority (APRA), introduced more stringent “stress tests”, requiring loan applicants to show they can afford monthly repayments at 3 per cent more than the current rate.
However, Madeline and Jacqueline got into the property market when the stress test was just 2.5 per cent above the then rate.
In December 2020, the sisters took out a $360,000 loan to build their dream home, enticed by first homeowner grants and the $25,000 HomeBuilder Grant (they later missed out on the $25,000 because they learnt that siblings did not qualify).
At the time of taking out their loan, their only option without a 10 per cent deposit, was to go with a small lender on a high variable interest rate of 4.54 per cent.
With four back-to-back rate rises, their repayments have shot up by $300 a month, and with more rate hikes expected to follow by year’s end, they could end up with a variable rate of about 8 per cent.
That’s a dire prospect the sisters have been contemplating as they fight to hold on to their home in Aveley on the outskirts of Perth.
If the RBA pushes ahead with another 50-basis-point rate hike on Tuesday, the cash rate will hit the highest level since December 2014.
It will tip many people like the Darkovska twins into further mortgage stress, and at risk of defaulting.
“We’ll probably have to sell the house if we can’t keep up with the repayments — it’s really scary for us,” Madeline says.
More Australians in ‘negative equity’ as house prices fall
Tougher lending standards are not the only problem for Australians who borrowed heavily at the height of the pandemic housing boom.
Many people who took out big loans, with low deposits, also face the prospect of falling property prices, which is another factor that can make them a “mortgage prisoner”.
If house values decline by 20 per cent over the next 18 months, as some analysts are predicting, that would tip more Australians into negative equity — when the value of property falls below the outstanding balance on the mortgage used to purchase it.
“Mortgage prison is where you can’t refinance, and the main reason that would be is if the equity in your property falls below 20 per cent,” RateCity’s research director Sally Tindall says.
“Banks, typically, will charge refinancers lenders’ mortgage insurance, which can run into the tens of thousands of dollars, if they’re refinancing, but don’t have that magic 20 per cent deposit.”
According to the latest data from banking regulator APRA, in the six months to March this year, the value of new loans written, with a deposit size of 20 per cent or less, was $112 billion. RateCity estimates this applied to more than 176,000 mortgages.
Ms Tindall says someone in Sydney who bought in December of last year with a 20 per cent deposit, is likely to be in mortgage prison already because the peak of the Sydney market was in January of this year and has been falling ever since.
Add to this, the number of people who can’t pass the banks serviceability tests, and that figure may well run higher than 176,000.
Analysis from RateCity shows someone who took out a loan in September 2020, and borrowed to capacity, may already be struggling to refinance – because they won’t meet the new lenders’ serviceability test.
RateCity modelled this by looking at someone who had an annual income of $100,000 (no kids, no other debts and minimal expenses) and took out a $747,500 loan on a variable rate of 2.69 per cent.
Fast forward to today they’d have a loan size of $715,022, would be earning an estimated $105,062 and if the RBA hikes by 0.50 per cent on Tuesday, they will be a rate of 4.94 per cent.
“If they wanted to refinance to a lower rate, we estimate a good rate would be 4 per cent, they’d fail the stress test,” Ms Tindall says.
“In fact, our analysis shows they will need to earn an estimated $5,538 (5 per cent) more than they currently do.
“By September next year, if the cash rate has risen to 3.35 per cent as forecast by Westpac and ANZ, they would need to earn an estimated $123,750 to pass the banks stress test if they wanted to refinance to a rate of about 5 per cent.”
Ms Tindall says these calculations are estimates only, as the amount someone can borrow depends on their personal situation and their lender.
“What we do know is CBA says that between 8.3 per cent and 8.7 per cent of loan applicants borrowed at capacity,” Ms Tindall says.
“These people are unlikely to be able to pass the banks’ serviceability tests in coming months or potentially already.”
Australians on low fixed rates could struggle to refinance
Christopher Ladley, who runs Mortgage Choice brokers in Elsternwick, Melbourne, is seeing more customers coming forward wanting to refinance.
He says interest to switch loans is especially high from Australians who are on fixed rates and are about to roll off next year or the year after.
“People are worried about interest rates increasing so fast and so rapidly in recent months,” Mr Ladley says.
“People are panicking, because they’re worried about what happens when I roll off a really great fixed rate.”
Mr Ladley notes that with the banks’ assessment rate for a variable loan now at about 6.5 to 7 per cent many people could struggle to refinance but urges people to check with a broker who may be able to assist.
“A lot of people, I guess, got the indication that interest rates weren’t going to increase until 2024, because the Reserve Bank told us so. So people listened to that advice and made decisions based on it.”
He says because of those RBA statements some of them “borrowed more than in hindsight they should have”.
“Some people, if they borrowed the absolute maximum a couple of years ago, they might not actually qualify for that same loan now in in today’s environment,” he says.
“The banks are now very conscious and focusing on the debt-to-income ratio. And they’ve really aren’t comfortable with people borrowing more than say six times their income.”
At risk of a mortgage trap? Consider refinancing sooner than later
Ms Tindall urges people who are not yet in a mortgage trap to consider refinancing.
“If you think that the proportion that you own of your home could slide below that magic 20 per cent mark, think about taking action,” Ms Tindall says.
She says there are many costs associated with refinancing, including switching fees, government administration charges and new application fees.
“But they [lenders] need new customers … ask them to waive that up-front fee, they might just say yes to secure your business.”
Ms Tindall also urges those who are already in a negative equity position not to panic.
“If you’re on a variable rate, it is your right to haggle with your own lender for a better deal,” she says.
For those who can’t refinance she says, “the key is to put your head down and keep your monthly mortgage repayments up”.
“If you can’t meet the rising cost of monthly mortgage repayments, the bank may start calling you wanting to have some tough conversations where you might end up having to sell your property,” Ms Tindall says.
‘Don’t sell false hope’: pandemic housing boom left more Australians in debt traps
The other big unknown is what happens with unemployment.
If people start to lose their jobs, like Madeline has, they risk defaulting on their home loans.
Unlike many other areas across the country, Aveley’s house price growth, where the twins have built their home, has held steady (up 1.2 per cent in the three months to August and up 3.7 per cent over the year according to CoreLogic).
But even so, twins would have already defaulted on their loan if it wasn’t for their mum’s help, since they do not meet the higher stress test being imposed lenders (and wouldn’t have even if their income had stayed the same, let alone gone backwards).
Jacqueline says they would have never had taken on a mortgage if it was not for policies and statements from the government and regulators.
She says they rushed into the market in the hope of getting the $25,000 HomeBuilder grant and promises from the RBA at the time that rates would not rise until 2024.
“Don’t sell false hope,” is her message to politicians and regulators.
“You sell the Australian dream, but you rip it out from underneath people.”
It’s one of the last remaining coastal suburbs in Queensland where you can buy a beachside block of land for under $300,000.
Just four-and-a-half hours drive north of Brisbane, Elliott Heads in the Bundaberg region is known for its sweeping white sandy beaches and idyllic weather.
But the seaside haven that is home to 1,160 people is earmarked to undergo a major metamorphosis that has been decades in the making.
Work has started on the $2 billion master-planned community South Beach that was the brainchild of local macadamia farmer John Manera.
“It took me over 27 years to actually accumulate this land, and when I bought the last farm I thought well maybe I could do something for the community here one day,” he said.
That dream is now becoming a reality, with groundwork starting on the first stage of the 2,000 residential lot development.
Residential lots were selling from $224,000 and South Beach development director Helen Blackburn said they were going quick.
“We released stage one to sell off the plan in December of last year and we sold [out] in one day, so 33 lots sold in one day,” Ms Blackburn said.
“We then released stages two and three in February this year and sold 101 lots in a week … so it has just gone nuts.”
The master plan — which appears to have the support of local residents — includes zoning for a shopping precinct, a 320-lot retirement village and a nursing home to be developed in coming years.
“It’s been about 17 years in the making to get it to this point,” Mr Manera said.
“The goal is to do something for the community, and make it all work, make everybody happy.”
He said the most important thing to him was that the younger generation had somewhere to “have a good life and a good time”.
The large scale of the development would also create more jobs in the area.
Ms Blackburn said there had been a lot of interest from buyers from further south.
“There are a lot of people moving up here from the Sunshine Coast … they have found that Elliott Heads is the next Noosa for them,” she said.
“It is a quiet little village and it’s beautiful here, you know your neighbours and you can get down to the beach … it is idyllic.”
Changing market for the regions
Data released by CoreLogic showed regional housing prices dropped by 1.5 per cent in August.
Head researcher Eliza Owen said the fall was tacked onto a rise in interest rates and the behaviour of capital city markets.
“This is really the effect of rising interest rates starting to impact people’s borrowing capacity and willingness to pay across different parts of Australia,” Ms Owen said.
“The fact that we’ve seen three successive rate rises of 0.5 per cent means this is going to start impacting those markets pretty rapidly.”
While the decline in property prices may pale in comparison to the 41 per cent upswing felt after the pandemic, Ms Owen said it was a sign of what was to come.
“It’s not unusual for cap cities to be a little bit of a bellwether for what happens in the region,” Ms Owen said.
“Regional markets usually lag capital cities in reaction to interest rates, because generally they’re not quite as pricey as what you see in cap cities.”
There are forecasts prices could fall by as much as 20 per cent next year.
But AusWide bank managing director Martin Barrett said regional cities would not experience the same declines as capital cities.
“I expect that we’ll see property prices in Bundaberg kind of level off but I’m not expecting that Bundy prices will materially kind of contract,” Mr Barrett said.
“The reason for that is we’ve got strong levels of rental demand.
“We’ve also got property prices that still remain relatively low compared to many places in Australia and particularly those big capital cities.”
Ms Owen said despite the market lagging that of capital cities, regional Queenslanders could expect property prices to continue to fall as long as interest rates kept rising.
“For some of these smaller markets you could expect more of a reasonable downswing, just given the fact that their slower prices generally make them slower, steadier performers,” she said.
“Overall, I think property prices are going to continue declining as long as we see upward shifts in the cash rate, and the cash rate is expected to peak in early 2023 at this stage.”