Every economic indicator in the UK has started blinking red, but the housing market has marched on relentlessly.
The Nationwide Building Society is due to release its latest June house price index this week, along with regional data for the second quarter, while the Bank of England’s latest mortgage loan figures should also shed more light on the state of the UK housing market. Prices are up 5% this year, although uncertainty about the broader economy has meant Nationwide has not released an annual home price forecast.
Few would have anticipated such brisk conditions as estate agents shuttered and homebuilders slammed down tools early in the Covid pandemic.
But demand remained strong due to the stamp duty holiday quickly introduced by Rishi Sunak to prop up the market after it reopens, and a desire for more space and a greener environment as many office workers transitioned to working from home. Even the end of the stamp duty holiday last summer and the rise of the highly contagious Omicron variant failed to stifle rising prices.
The housing market frenzy is being driven in part by a shortage of available properties, meaning many newly listed homes are selling out within a week or two. Mortgage rates were low and the labor market was surprisingly strong: unemployment remained at 3.8% in April, the lowest since the 1970s.
Nationwide did see annual house price growth slow to 11.2% in May from 12.1% in April, but that was due to base effects and the monthly gain was strong at 0.9% — the 10th straight monthly increase, it said Nationwide’s chief economist Robert Gardner noted.
The key question is how long the market can remain insulated from the cost of living crisis if UK inflation hits a new 40-year high of 9.1% in May and the Bank of England raises interest rates five times. Gardner says there are only preliminary signs the market is slowing, though like other experts he expects it to cool off in the coming months amid the economic slowdown. Mortgage approvals in the UK fell to 66,000 in April from 69,500 in March and net mortgage borrowing fell to £4.1 billion from £6.4 billion; both measures were slightly below the pre-pandemic average.
However, analysts point to the robust job market, an ongoing housing shortage and mortgage rates that are still cheap by historical standards.
“I didn’t expect house prices to go up when the UK government shut down the property market: I thought house prices would be flat at best,” says Anthony Codling, an independent property analyst and founder of property website Twindig. “House prices in the UK have soared to new heights and many will hope it’s not a matter of what goes up must go down.”
Real estate firm Knight Frank is optimistic: It just upgraded its forecast for home price growth to 8% this year from 5%, just below last year’s 10%.
The impact of rate hikes on existing mortgage holders should be limited, as more than 80% of them have fixed-rate contracts. In 2007, at the start of the global financial crisis, about 45% of mortgage loans were adjustable rate, and that number rose to 65% in 2013. A typical mortgage payment is 31% of net earnings, just above the long-term average of 29%, but still well below the 45% highs seen just before the financial crisis.
But Gardner said a 10% down payment on a typical first-time buyer home is equivalent to 56% of median annual income.
Meanwhile, life seems tougher for renters than for homeowners. The Center for Economics and Business Research says agreed rents on new contracts rose 10.6% in the year to May, with London rents rising the fastest at 15.7%.
The housing market seemed immune to Covid shocks. This week should show whether the cost-of-living crisis can throw them off track.