House prices: Expert discusses ‘interesting’ pricing differences
Buyers who over-stretched their finances and took advantage of ultra-cheap mortgages are vulnerable to a rise in costs. Those who bought and are buoyed by cheap debt might also fall foul of falling prices as their homes tip into negative equity.
People whose mortgage debt is bigger than the value of their property will struggle to move or remortgage.
The Financial Conduct Authority found in 2013 that as many as 630,000 households were in negative equity after the financial crash. Between 2007 and 2009, prices fell by 18 percent.
A boom which saw prices rise 20 percent a year in the late 1980s led to a bust in the 1990s when the market fell from 1990-94.
By the middle of the 1990s, more than one-in-10 mortgage borrowers had more debt than their property was worth.
Millions of homeowners face negative equity if the value of their homes fall
The average price tag on a home across Britain has rocketed
House buyers today have stretched themselves as never before to get a foot on the property ladder.
Prices have recently soared to a string of record highs despite tougher economic conditions caused by the Covid pandemic and the cost-of-living crisis.
The Office for National Statistics now reports prices at more than nine-times average earnings.
Those who could afford to buy benefited from lower interest rates. The base rate is now one percent after a series of Bank of England hikes.
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The Bank has raised the base lending rates to curb soaring inflation, but it means mortgage costs will inevitably rise.
According to broker Trussle, the average homeowner with a £ 224,000 mortgage can expect to pay £ 1,000 extra interest a year as a result.
A large deposit should provide some homeowners with an equity cushion which ought to protect them from the market crashing.
However, a significant number do not have such a pot to see them through.
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One buyer in six in late 2021 had a deposit worth less than 10 percent of their home, according to the Bank of England.
With more than 70,000 mortgages approved each month, this means there are more than 11,600 small-deposit buyers or about 135,000 a year.
The typical interest rate on a two-year fixed mortgage for a buyer with a 25 percent deposit has nearly doubled from 1.2 percent in September to just over 2.3 percent in April.
People with a 10 percent deposit have seen the rate rise from below two percent at the start of the year to 2.6 percent now.
New borrowers are of particular concern.
Two women studying the house price signs in an estate agents window, in Kentish Town, London
Some analysts warn that if prices drop to the extent seen in the wake of the financial crash or in the early 1990s, then those with 95 percent mortgages risk falling into negative equity.
Andrew Wishart from Capital Economics told The Telegraph: “If you are only just in negative equity, then you have more hope prices will rise again at some point.
“When you get declines of more like 20 percent, that negative equity becomes forced sales. People sell the house and walk away from the mortgage.”
Surveyors say there is “little evidence” that the pace of house price growth is losing much momentum.
The Royal Institution of Chartered Surveyors (Rics) said a limited supply of available properties and a steady growth in demand remain the overriding drivers of house prices.
Rics’ survey of property professionals last month found a net balance of 10 percent reported a rise in new buyer inquiries rather than a fall.
It marked the eighth month in a row in which the survey returned a positive net balance.
On supply of available homes, slightly more professionals reported a fall in new property listings compared with those who reported increases in new listings in April.
Overall, this indicated a flat trend in new homes coming on the market.
The number of agreed sales was also broadly flat in April, having increased for the previous two months. Sales are expected to remain flat when looking to the year ahead.
Surveyors also expect prices to continue rising. For next year, 62 percent anticipate price increases, although this is down from 78 percent in February’s survey.
Rics economist Tarrant Parsons said: “Despite growing macro headwinds in the form of cost-of-living pressures and higher interest rates, the UK residential market continues to see modestly positive trends in new buyer inquiries.
“For the time being at least, even though there is a lot of caution about the future economic landscape, it seems that limited supply available on the market, coupled with steady demand growth, are still the overriding drivers of house prices.
“As such, there is little evidence at this stage of house price inflation losing much momentum, while expectations for the coming 12 months have only moderated slightly from recent highs.”