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House price inflation in the UK has come to a standstill. The latest nationwide data has indicated that prices have gone up only 0.5% in the 12 months to October, the smallest annual increase for over two years. If you are saving a deposit on a salary, the headline is a positive one for you. The twist is that lower-priced properties are being matched with quite higher-priced loans.
Quick Facts on UK House Price
- Annual growth: +0.5% in October, from +0.8% in the year to September
- Average price: £273,566, unchanged from the previous month
- 5-year fixed: 5.99% for the first time in 3 years to hit 6% territory
- Two-year fixed rate: averaging 5.97%
- Bank of England base rate: Stands at 3.75%, but is likely to jump to 4% soon.
- Government support: a new £4.7bn Your First Home scheme for first-time buyers
Why the Market Is Cooling
Nationwide‘s chief economist credits concerns about inflation, in part related to the Middle East battle, with driving expectations for higher rates nationwide. There is more volatility in the bond market, and that has helped to drive up the swap rates that lenders use to price fixed mortgages, despite the base rate’s lack of change since last December.
The outcome is a sluggish UK housing market due to low demand. New buyer demand has stayed soft, and October homeowners were even less optimistic about the economy and their own financial situation, according to surveyors. Nationwide forecasts that prices will improve further.
What 6% Mortgage Rates Mean for Workers
When interest rates rise, a level average price isn’t much help regarding affordability. Let’s look at a basic example: if you have a loan of £200,000 and pay it off over 25 years, the monthly mortgage repayments will be approximately £1,290 at 6% compared to £1,055 at 4%. This works out at an additional £230 per month, excluding bills and childcare.
If the salary increase hasn’t kept up, the difference determines whether it is a realistic buy or not. The key point for mortgage affordability for employees is the rate locked, not the price, and that’s why there are far fewer people bidding than waiting.
First-Time Buyers: Does the New Scheme Help?
The Chancellor has announced the launch of a £4.7bn Your First Home scheme for first-time buyers throughout the UK who don’t rely on family funds. Analysts are predicting a relatively small contribution to the market. As mortgage costs continue to rise, one Knight Frank property researcher suggested that the support offered in the budget isn’t enough to compensate, and a Pantheon Macroeconomics economist says that property prices will remain muted next year.
What Should Workers Do Now?
There is no magic bullet, but a few steps you can take to safeguard your position:
- See homes at today’s rates, not last year’s rates.
- Compare the term duration, as the two-year term looks similar in price in comparison with the five-year term right now.
- Keep an eye on the Bank of England decision, as it would inevitably filter through to new deals soon.
- If you are purchasing a home without family support, you should consider the Your First Home scheme.
- Leave a margin for repayments, since there is no sign of any relief in household financial pressures.
The Bottom Line
UK house price growth has slowed down, which may give buyers some leverage and means sellers may have to reduce their asking prices to line up buyers. However, for relief for workers, there are 6% mortgages involved. The cost of owning a home is still the issue, not the price, and the interest rates are not easing up.
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