"Bank of England base rate rise was inevitable"
As the economic uncertainty surrounding the country continues to increase, fuelled in part by rising interest rates, the possibility of pausing purchase plans is steadily increasing.
There are many external factors impacting the housing market at present which is resulting in some uneasy feelings within the industry.
“The fast-rising interest rates, combined with the increased uncertainty about the economy, personal finances and a widespread cost-of-living squeeze may push some buyers to pause their purchase plans,” said Iwona Hovenko (pictured), equity research analyst of real estate, housing and construction at Bloomberg Intelligence.
Nigel Green, founder and chief executive of deVere Group believes that it was inevitable the Bank of England (BoE) would hike rates further last week, as he said the bank was complacent and passive about inflation last year when the country emerged from coronavirus lockdowns.
“Now they are having to play ‘catch-up’ with aggressive rate hikes, which is pushing the UK’s consumer-led economy into recession,” Green added.
Hovenko believes this could result in a drop in house-sale transactions, the magnitude of which will depend on the scale of economic disruption.
According to Green, it is likely that the base rate could hit 4% by spring next year due to persistent increases in forecast inflation and soaring energy prices.
“We believe the inflation will peak in the middle of next year, which will result in the Bank of England acting accordingly, by slowing rate rises,” he added.
That said, Hovenko believes the energy price cap for UK households announced by the government may help prop up confidence and limit a surge in energy bills that could have squeezed even the better-off households. According to Hovenko, this supports her view that any UK housing-activity weakness may be more visible in the decline in the sales volume rather than a house-price drop.
“This is our base-case scenario, as well-capitalised households have more flexibility to refuse a sale rather than accept a large discount on what is often their biggest asset,” she added.
A fall in the stock of homes available for sale, from an already near-record low, Hovenko said may also provide a floor for house prices, as transactions that do happen are driven by buyers who need to move due to personal circumstances.
She explained that such a scenario has already played out several times in recent years with post-Brexit referendum uncertainty reflected more in sales volume rather than prices.
“Similarly, in the first weeks and months of the COVID-19 pandemic, before the direction of prices was clear, sellers rejected buyers’ requests for steep price discounts. The major difference now may be much-higher interest rates and widespread inflation,” Hovenko said.
If transactions fall steeply, she outlined that headline house-price moves could be determined by a relatively small number of sales, which might not be representative of the broader underlying health of the market.
As such, she believes some ‘negative selection’ may occur among sellers, if the most resilient ones, who do not have to sell, step back. Meanwhile, only households under some financial pressure may have to accept a discount.
“Yet, we see such transactions being the minority, reinforcing our belief about house price resilience, given that, for several years, due to the low housing affordability and tight lending criteria, only the relatively better-off households have been able to buy a house,” Hovenko added.
“Our base-case scenario is for house prices to stagnate next year, with some low-single digit swings possible in either direction, given the scope for low volume of sales.”
However, Hovenko detailed that regions which have appreciated the most in the last two years and where average earnings are lower, may be more vulnerable to price-declines.