Housing market resilience may face challenge if mortgage rates increase, according to RICS.
In 2023, the UK housing market is skating on thin ice, with several factors including mortgage rates, stamp duty changes, and potential rental market shifts like the Renters' Rights Bill painting a complex picture. Here's a lowdown on the current housing market atmosphere.
Mortgage headaches
- The markets have been experiencing a chilling effect as mortgage approvals sank around 55%, from a skyscraping 187,000 in 2022 to a measly 83,400 in recent times. This downward spiral is causing a severe squeeze on housing demand, potentially indicating a cooling market or even a downward trend[3].
- In 2022/23, mortgage rates skyrocketed, reaching approximately 6%. This hefty increase led to a sharp drop in sales. However, by 2024, rates eased up, causing a rebound in sales and mortgage demand, only for it to dwindle again to sustainable levels as of now[4].
- Renewed optimism has been observed in more affordable areas like northern England, Scotland, and the East Midlands following some improvement in mortgage affordability testing[4].
Dance with the devil: Stamp duty shenanigans
- Several tax policy shifts have gripped the property market, especially the buy-to-let (BTL) sector:
- The stamp duty surcharge, originally at 3%, rose to 5% for BTL and second homes from October 2024, effectively adding thousands in extra costs (e.g., £6,000 on a £300,000 property)[3].
- This steep stamp duty surge has left no room to breathe for BTL investors, resulting in a 44% slump in BTL lending volumes, effectively starving investment activity in the rental sector[3].
- Moreover, the abolition of mortgage interest tax relief has taken the shine off property investment for some[3].
The building boom and bust
- The housing market's construction sector saw a flurry of activity in Q2 2023, with builders rushing to complete projects ahead of new costs. However, starts have now slowed significantly, with completions dropping by 13% in Q3 2024 in relation to the previous quarter, and 12% compared to Q3 2023[5].
- Recent regulatory changes related to energy efficiency and electric vehicle infrastructure have influenced construction timings, but the trend shows fewer new homes coming onto the market in the near term[5].
Tenants: The new landlords?
- The Renters' Rights Bill, while making headlines in the future, has yet to have significant data on its impact. Nevertheless, the ongoing onslaught of tax changes and regulatory reforms affecting buy-to-let investors, coupled with the likely strengthening of renters' rights, could put an added strain on the rental market[3][4].
- This legislative tightening could result in landlords becoming more cautious or selective, potentially leading to a diminishing rental supply and rising rents. On the other hand, the bill might increase costs or regulations for landlords, potentially exacerbating supply constraints in the already tight rental market.
2023's market forecast: A cautionary tale
- The UK housing market is grappling with weaker mortgage lending and buyer demand due to high-interest rates and increased property acquisition costs from hefty stamp duties.
- House price growth is slowing or showing regional disparities, with more vigorous activity and price growth in more budget-friendly regions outside the South[4].
- Buy-to-let investment is under siege from tax changes and regulatory reforms, which may lead to reduced rental supply growth and a potential impact on the rental market.
- In summary, 2023 could present a tough year for the UK housing market, with mortgage rate pressures and tax reforms constraining demand, particularly in investment properties, while housing supply constraints and rental market adjustments add to the tale of woe[3][4][5].
- The increasing mortgage rates and stamp duty changes, combined with potential impacts from the Renters' Rights Bill, are causing concerns in the finance and investing sectors, particularly in the UK housing market and real-estate industry.
- The current atmosphere of the UK housing market reveals a potential slowdown or reversal in the property market due to mortgage headaches, increased tax costs, and supply constraints, especially in the buy-to-let and rental sectors.
