It’s a buyers’ market and prices could fall by 25% – or more
Agents give their verdict after figures from Nationwide showing house prices fell in November for the first time in two years.
The UK is fast becoming a buyers’ market for property – with agents fearing that prices are set to fall further.
Their warning comes in the wake of figures showing house prices falling for the first time in two years.
Prices fell by 1.4% month on month in November – the biggest drop since June 2020, according to Nationwide.
One Scottish agent has even forecast a potential 25%-plus fall in average property values as the recession takes a grip on the nation.
Marie Johnstone, Managing Director at Edinburgh-based estate agents Wilson Property Group, commented: “For now, the property market in Scotland is holding up, just. Higher end luxury homes in Scotland remain sought after and are still selling well despite the challenging economic conditions.
“However, as the recession takes hold in the coming six to 12 months and unemployment almost certainly rises, we will see a seismic shift in the property market and prices will start to fall.
“With rates set to rise further as the Bank of England attempts to rein in inflation, we could be in line for a 25%-35% decrease in average property values that it could take a decade to recover from.”
She added that by January, it would be very much a buyer’s market in Scotland – and warned that landlords are selling up portfolios, often at a significantly reduced rate. “The cap on rental income has driven further uncertainty into an unstable marketplace,” she explained.
Buyers offering 10%-15% below asking price
Meanwhile Zaid Patel, Director at London-based estate agents Highcastle Estates, said: “We are now in a market where buyers are trying their luck by offering 10%-15% lower than asking price to see which seller will panic sell. Not only are property investors lowballing, but so are first-time buyers, as they factor in their additional mortgage costs.”
He said there were now a few sellers who are ready to take a ‘loss’ and move on with their life for a fresh start in 2023.
“Equally, there are plenty of cash buyers, who have liquidated some of their assets, on the look out for deals,” he added.
“They will now be integral to managing this housing market more than ever. Once prices drop 10%-15%, which they likely will, expect an influx of cash buyers, stabilising and settling the market.”
Jason Tebb, CEO of property search website OnTheMarket.com, predicted the “inevitable rebalancing” of the market would continue.
“All the upheaval – the macro-economic challenges and the chatter around mortgage rates, which although coming down are still higher than we have grown used to – will inevitably impact the confidence of the average property-seeking consumer,” he said.
“However, people move for many different reasons and that’s not going to change, even in challenging conditions. Experienced local agents are coming into their own, guiding sellers through a tougher market, which will level out in time.”
Increased borrowing costs and affordability pressures
Nicky Stevenson, from national estate agent group Fine & Country, noted that buyers remain anxious about increased borrowing costs and affordability pressures.
“These factors mean some buyers may have temporarily pressed the pause button following the recent period of volatility in the mortgage market,” she said.
“While a further cooling of prices is expected over the winter, this effect may be mitigated in part by the return of stability to lending markets and more realistic pricing of loans.
“In the meantime, buyers will be keeping their feet firmly on the ground when making offers.”
However, Iain McKenzie, CEO of The Guild of Property Professionals, was slightly more upbeat in his outlook, and said November’s fall “shouldn’t come as a surprise after months of economic upheaval”.
“Let’s not forget though that house prices have been growing at unprecedented levels in the last couple of years, and a slight readjustment in the market was likely to happen sooner or later,” he pointed out.
“This cooling effect is unlikely to turn into a great freeze, so long as the demand from buyers remains buoyant. We previously saw house prices drop significantly during the Global Financial Crisis – however, growth eventually returned and has sustained ever since.”
He added: “When this happened before, the government introduced the stamp duty holiday, giving the market the shot in the arm it needed to incentivise people to buy.
“Another version of the Help to Buy would go a long way towards giving the necessary support for first-time buyers, but it needs to be made available to all types of properties.”
‘Supply shortage will offset softening prices’
Another more positive appraisal came from former RICS Residential Chairman Jeremy Leaf, a north London estate agent.
“Prices are softening but could have fallen further were it not for those two stalwarts –shortage of supply and strong employment, despite continuing concerns over the rising cost of living and particularly mortgage repayments,” he said.
“The problem is not existing sales, the overwhelming majority of which are proceeding, but new business. Some buyers are returning now that mortgage rates are beginning to fall but they are more aware of their stronger position so are negotiating hard.”
Tomer Aboody, Director of property lender MT Finance, agreed the downturn wasn’t surprising in the aftermath of the Kwasi Kwarteng mini-budget.
“As the market continues to stabilise since Rishi Sunak took over, we should see a steadier picture going forward,” he said.
But he, too, called on the government to do more to help buyers.
“With buyers stretched when it comes to affordability, the government needs to assist in helping banks be more flexible in their lending and helping buyers continue to move. Could the government potentially help by writing off some mortgage payments against tax for example?”
The future is certainly difficult to call but it must be obvious to everyone involved that FTBs finding themselves stretching their household budgets by, maybe, £400 a month will need to reduce their outgoings somewhat. Most throw the kitchen sink at buying their first home and don’t have the luxury of spare financial capacity. If they were to reduce their mortgage payment by £400 to balance their books then at 3.5% over 25 years their borrowing power would drop by £80k. Some will extend from 25-year to longer mortgage terms. Others will scrape the money together from family – keeping in mind that the long-term trend for prices has historically been on the up. In 1973 when the market faced similar challenges of high inflation, a Middle-East war and energy shortages, the average price was in the region of just £4k. There’s been a lot of water under the bridge since then. At that time, it felt as though the property world had ended – but it recovered, failed, recovered failed again several times. And here we are today with average values at around 75 x what they were back then!
Many will face the alternative challenge of increasing rents. They can’t fix those but they can fix their mortgage payments for 5 years. Also, there are many instances where monthly rental costs are higher than a monthly mortgage payment would be for a similar property. Empty-nesters in particular are stuck between a rock and a hard place. High rental costs may yet prove beneficial for the sales market. But let nobody be under any illusion that there won’t be a market adjustment. I suspect that many of those will simply delay flying the nest and will stay at home until prices fall, or they’re earning more, or we see a return to low inflation. But there will still be some buyers who won’t have that luxury. And for them, they will NEED to see price flexibility otherwise they just won’t have the ability to buy.
The biggest challenge for agents will be those sellers who will think that they can buy cheap and sell their own properties at last year’s price. That way is the road to hell because by ‘testing the market” when there are fewer FTBs around to support the market, they’re behaving illogically. Agents will succeed only in bloating the market with unsellable properties. The more of those there are, the longer the downturn will last, and the more vendors who will need to be serviced. Fail to say ‘no’ to those sellers and the potential for a massive fall in prices becomes even greater.