Nationwide HPI November 2022

Much like the property market, demand for residential mortgages in November slowed. A handful of my clients have put their plans to move on ice for now, hoping for a combination of falling house prices and lower fixed mortgage rates as we head into the new year. While it is almost certainly now a buyers' market, only a small percentage of those buyers will be landlords. Landlords have lost tax perks in recent years and they now face losing the ability to efficiently draw income via dividends for limited company buy-to-lets, along with the risk of lower Capital Gains Tax allowances. Combined with the increase in rates, fees and stress tests on buy-to-let mortgages, many property investors are holding back for now, which is no bad thing for first-time buyers seeking to escape the rental market. First-time buyers face less competition as landlords lick their wounds. While house price growth will slow and possibly fall, I don't believe we'll see a significant house price crash like we did back in 2008. Lenders have funds to lend and are lending sensibly and there just isn't enough supply, which will support prices. This should keep house prices from plummeting.

The purchase market pretty much evaporated in the hours and days following the mini-Budget, as lenders' hiked their rates and uncertainty gripped the nation. With inflation still rising and the base rate almost certainly set to be raised again this month, people are waiting to see what happens. On a positive note, gilt and money markets have stabilised and we are seeing fixed rates nudge down. Hopefully, this could make buyers a little more confident. First-time buyers seem to be the most active demographic within the market at present. Though mortgage rates are higher, rental payments are bordering on the obscene and they know they hold all the aces when it comes to negotiating with sellers. As early as September we started to see a larger number of buyers securing deals under the asking price and with talk of house prices dropping up to 10% next year, this looks set to be a common trend. Ironically house prices will fall to where they probably would have been if we hadn't had the Covid boost in the market of the past two and a half years, which could be a worry for people that have bought with 5%-10% deposits.

For now, the property market 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 6-12 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. By January, it will very much be a buyer's market in Scotland, much like the rest of the UK. In Scotland, landlords are selling up portfolios, often at a significantly reduced rate. The cap on rental income has driven further uncertainty into an unstable marketplace. We could see an avalanche of flats coming onto the market in the New Year once the short-term lets have cashed in on the Christmas trade. The change in the rules from April 2023 is driving this. Where we are likely to see demand is from international buyers given the weakness of Sterling.

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. As we approach the end of the year when the property market falls into a lull, there are a few sellers who are ready to take their '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. They will now be integral to manage 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.

The Kwarteng/Truss fiscal statement put paid to the home purchase market for Q4, but anyone who thinks property values are going to plummet 30% next year is failing to read the stories behind the headlines. Think of the current property market a bit like a Boxing Day sale. People are simply choosing not to buy right now until they see exactly where prices are going to stabilise. You don’t go from 20 buyers for every one home on the market to a 30% drop within months. Make no mistake, demand is still there and I feel the market will prove its resilience once again in 2023 like it always does. If values do come down next year, this is tremendously positive news for first-time buyers and those looking to upsize as there should be more opportunity to negotiate on asking prices. Property should always be viewed as a long-term investment, as some years values come down, but most years they go up and history tells us that those who bought at previous peaks tended to make money on their homes in the long run.

Many of our clients are sitting tight and waiting until the New Year before looking to buy property. Partly it's the time of year, but mostly it's a realisation that house prices are falling and there's no harm in holding off. I'll be surprised if house prices don't fall at least 10% next year, but 15%-20% is entirely possible for three reasons. First, 95% LTV mortgages are likely to disappear, removing a key support for the housing market. Second, current prices are simply unaffordable when even a tracker rate mortgage rate is likely to be 4%-5% soon. Third, a lot of forced sellers will drive down prices.

Demand from property investors and landlords definitely dropped last month but among owner-occupiers, it stayed much the same, and even grew slightly. A lot of landlords are holding back for a possible price crash so they can swoop in and buy property at a bargain. I don't think we will see as bad a recession as we are led to believe. Drive past a fast food drive-thru and it's full. Go to the town centre, and it's rammed. People are still spending and living pretty much the same. There is more worry maybe, but not many have changed their habits for now at least. Historically, house prices are never been on a continued upwards curve, and there are always dips. What drops will pick back up again. I don't believe that we will see a huge crash like the 80s or during the Global Financial Crisis, but I do think we will see a small one. Lenders have been working affordability into their applications for exactly this event.

Yes, October was a tough month but we did not see any drop off at all for residential property in November. Where demand has fallen is among landlords due to the rental income not fitting the required debt service coverage ratio the lenders require in order to meet the now higher monthly mortgage payments. In the past six months or so, savvy landlords have been releasing maximum equity from their portfolios when rates were low and fixed their mortgages in for five years. They now have a cash surplus to snap up properties when the expected crash occurs. I can see why we think it would be a buyers' market now but I think, due to the sheer demand for property, we are still very much in a sellers' market and will be for quite some time. The only way I see this changing is if we have an influx of new properties being built. That said, I do not think it's going to be as competitive for buyers and I doubt offers will be over market value as they were at the beginning of the year. Prices could fall by 10%-15% max. While rates are rising, lenders will always want to lend and are creating ways of doing so whether this is by relaxing criteria and affordability calculations or offering higher loan-to-values. Because of this, I believe the market will stay afloat and we also have many overseas investors in the UK who are not going to be affected by the UK cost of living crisis so can still purchase properties, which will support values. Even with a recession, I do not think we will ever see a repeat of 2008 again and even with a rise in unemployment there are still going to be those that have planned for this and will do well during this time, whether that's buying properties at auction that have been repossessed. I think there is such a divide in the UK now between the rich and poor that the rich will benefit from this recession and the ‘poor’ will be the most affected, but it's likely that those in this group were not the ones purchasing properties in the first place.

Despite rising interest rates, I'm still meeting with clients who are keen to make offers on property before the end of the year, although clearly they are going in far lower than they would have six months ago. Lower offers have been accepted in 70% of the cases I’ve dealt with but, as for the other 30% of sellers, if they're not desperate to sell, they’re happy to sit on their property with the hope of receiving asking price or not far off. As a result, I'd still say we are in a buyer's market, for now at least.