The UK housing market is struggling with the drag of higher mortgage rates and a sharp increase in the cost of living as it heads into the crucial spring property selling season, threatening to derail deals and the government’s ambitions for more new-builds.
Home sales were a fifth lower at the end of February than the booming market in 2022, according to Zoopla, and 2 per cent below the five-year average. FTSE 100 housebuilders Persimmon and Taylor Wimpey said this week that sales of new houses were trending around 20 to 30 per cent lower year on year.
Housebuilders and agents face a daunting hit to revenues if sales stay sluggish, setting up a make-or-break spring as companies hustle to win over buyers and shift properties.
“It is a really critical period,” said Tim Bannister, Rightmove’s director of property data. “I think all eyes have been on how we started this year . . . and then, critically, what does the spring selling season look like given the new paradigm of higher interest rates.”
Agents and analysts say the property sector is still reeling from the “mini” Budget in September, which caused chaos in the mortgage market as lenders pulled loans and rates spiked. Mortgage availability has improved recently but rates have stabilised at higher levels, adding to the financial squeeze on buyers also facing the highest UK inflation in decades.
“Ultimately we still don’t quite know what way the year will go,” said Guy Gittins, chief executive of estate agents Foxtons. “Consumer confidence certainly took a hit at the end of last year. We started this year concerned that trend would continue.”
Companies have kicked their sales machine into high gear as they head into the traditionally busy spring season. Persimmon said it has sent “mystery shoppers” to test its salespeople, and launched a retraining scheme to adapt its tactics to higher borrowing costs and the end of a long-running government scheme to help first-time buyers secure mortgages, called Help to Buy.
“Many [advisers] are used to selling with the help of Help to Buy and very low interest rates,” said Dean Finch, chief executive.
Housebuilders have also ramped up the perks available to buyers, including offering to pay their mortgages for up to 10 months, as well as more typical freebies such as upgraded kitchens and carpets. These incentives have averaged 3 to 5 per cent of selling prices so far this year, up from 2.5 per cent last year at Persimmon and Taylor Wimpey, and have helped to keep prices of new houses steady.
However, housebuilders warned that their fortunes are tied to what happens in the wider housing market. “There are 28mn homes in the UK. Last year, new homes for sale would have been around 200,000. So we are a relatively small part of the market. We are price takers,” Jennie Daly, Taylor Wimpey chief executive, said.
Estate agents are also working harder to find buyers and keeping a close eye on prices as clients become more choosy and non-committal. House prices fell 1.1 per cent in February compared to the year before, the first annual drop since the Covid-19 pandemic briefly brought the housing market to a halt in 2020. Sellers are having to accept the largest discounts to asking prices since 2018 to clinch sales, at 4.5 per cent on average in February according to Hometrack.
“When prices are not going up, it becomes harder to make sure [a sale] goes through smoothly. There’s more risk to the transaction and the offer, the agent has to work harder to make sure the parties don’t fall out . . . There is less urgency on the buyer’s side, but there are buyers,” said Dominic Agace, chief executive of the estate agent Winkworth.
Zoopla said more deals than usual are falling through after the initial agreement, meaning more houses are coming back on the market. An underwhelming spring selling season would add to fears of a collapse in house prices.
The coming months also represents the last hope for housebuilders to salvage their 2023 season, which has already been badly dented by the autumn downturn. “Our selling year for 2023 started in September of last year, and that obviously coincided with the fallout of the “mini” Budget. Inevitably, 2023 is tough,” said Finch.
Taylor Wimpey and Persimmon warned of as much as a 35 to 40 per cent year on year fall in the number of new homes they sell in 2023 if current sales trends continue. That scenario would leave a significant hole in the government’s target to build 300,000 new homes annually. The supply of new houses peaked at 242,700 in 2020.
“On housing, we have really got to a difficult position. The fundamental disconnect of supply and demand is just worsening. Every year that we fail to meet the government’s target of new homes, it just gets worse,” said Daly.
Still, analysts and executives say that the market has recovered from the depths of last autumn faster than expected. “What we’ve seen is the market turn back on quite quickly after Christmas. That’s what is taking people by surprise,” said Tom Bill, Knight Frank’s head of UK residential research.
A cooler property market would mark a return to pre-Covid conditions after more than two years of intensive dealmaking, partly driven by the stamp duty holiday introduced after the first lockdown, and rapidly rising prices. Zoopla, however, said demand this year was still 15 per cent above 2019 levels.
“I think it’s actually going to get better,” said Richard Donnell, executive director at Zoopla. “The more price falls stabilise . . . or if people don’t think there’s big price reductions happening, then I think that will bring people into the market in the run-up to Easter.”
Smaller properties and flats are also likely to be more attractive this spring, agents said, as higher mortgage rates weigh on buyers’ budgets, while the cost of living squeeze is likely to push more people to downsize or sell second homes that are costly to heat.
Andrew Perratt, head of Savills Residential, said: “I think we are past the point of maximum pessimism, but I’m not saying there are no choppy waters ahead.”
