Residential Market Update August 2022 – Rates increase but prices still rising
Market Update August 2022
Inflation, interest rates and the mortgage market have continued to dominate headlines this month. The Bank of England increased interest rates by a further 50 basis points to 1.75%, with Reuters commenting that another 0.5% rate rise is likely again in September. House prices continue to rise despite more challenging economic conditions. Monthly mortgage approvals increased again in June, although we will have to wait to see exactly how the impact of rising interest rates will play out in mortgage market over the coming months.
Inflation, interest rates and the mortgage market
Early August saw two Bank of England announcements which impacted the housing market. On 1st August, the Bank removed the requirement to impose an affordability test, which required lenders to assess whether potential borrowers would be able to afford an interest rate hike equivalent to 3%. Which, as interest rates rise would have meant much tighter affordability criteria for borrowers. While Loan to Income thresholds remain, this added more flexibility for both lenders and borrowers.
Days later the MPC voted 8-1 to increase the base rate by 50 basis points to 1.75%. Most borrowers will be shielded from rate rises in the short term due to the proliferation of fixed rate lending, but higher rates will mean new borrowers will be paying more or be able to spend less.
Despite worries surrounding increased monthly mortgage payments, monthly mortgage approvals increased by 4% from May to June 2022.
Will green home improvements be key to securing higher prices?
With another energy price cap rise on the horizon in October, it is unsurprising that homeowners and tenants focus remains on reducing the cost of their energy bills. Rightmove’s latest Green Homes Report outlines that sellers who have improved the environmental performance of their property have secured on average 16% higher prices than those with no improvements. The report also found that buyers are requesting price cuts for homes with lower energy performance ratings, perhaps allowing them to make the improvements themselves? Meanwhile, survey results from JLL’s latest Living Priorities Survey found that over half of respondents would pay a premium for a more environmentally friendly home.
House prices
Despite rising energy costs and inflation dominating headlines for some time now, house prices have so far appeared to be immune. Annual growth (the year to May 2022), in the UK reached 12.8% in May, the highest level seen since August 2016. Meanwhile, annual growth in London was at 8.2%.
Rents
The rental picture remains unchanged across the UK. Supply of rental stock failing to keep pace with demand, pushing values to record levels. According to the latest rental index data (July 2022) from Homelet, the average rent in the UK has risen 9.5% over the past year, to £1,127 pcm. London has seen the highest annual rental growth of 13.6%, with average prices now over £1,800 pcm.
Demand
The RICS reported demand for rental properties was still outstripping supply in July, despite landlord instructions having increased. After a fall in new buyer enquiries in the UK sales market from April to June, buyer demand has increased marginally in July. The number of agents expecting price rises over the next 12 months has increased in July.
