Signs of a housing market slowdown have been brewing since the spring, but this week provided the clearest indications yet that a prolonged decline in activity and prices could be in store.
Some of the UK’s biggest property developers have said fewer buyers are booking new homes for them in recent months.
Estate agent Winkworth suggested rising interest rates were already cooling the market, as he reported an almost 40% drop in sales.
And a series of closely watched confidence measures showed that the UK property market looked increasingly likely to tip into a downturn.
The changes in the market caused by soaring inflation mark an abrupt end to the conditions that have been very favorable to property developers over the past decade, with low and stable borrowing costs, and the government introducing a number of policies to support housing demand.
“Trading since July 1 has definitely been tougher,” said David Thomas, chief executive of Barratt Developments, the UK’s largest homebuilder, which announced its annual results on Thursday.
“There is no doubt that consumer confidence is low and there is uncertainty in terms of the cost of living, inflation and the political context,” he added.
If demand continued to stagnate or fall, developers would start offering incentives such as free mats to keep buyers coming back. “Bringing the price down is really a last resort,” Thomas said.
Greg Fitzgerald, chief executive of Vistry Group, which last week struck a £1.25billion deal to acquire rival homebuilder Countryside Partnerships, agreed challenges in the economy had dampened price growth real estate.
“Until April, I think we were in an unsustainable market, with house prices rising too quickly. Now we’re back to a historic norm,” he said.
“The only thing that worries me about the market right now is [developers’] stock prices,” he added.
Shares of listed developers have fallen around 40% since the start of the year, as investors anticipate lower house prices and a sustained slowdown.
Home sales have fallen for five consecutive months, according to the Royal Institute of Chartered Surveyors, the trade body for the property industry.
When RICS asked its members what they thought was going to happen next, it found they were “the most downcast since the show began in 2012”. The vast majority of members expected home sales to fall in the coming year.
“Concerns over the economic backdrop and rising interest rates continue to weigh on market momentum,” said Tarrant Parsons, senior economist at RICS.
“Given that projections for the UK economy point to a potential recession towards the end of 2022, [survey] respondents expect home sales to continue to fall in the coming months,” he added.
There are already indications that house prices are leveling off, after two years of meteoric growth.
Over the past 12 months, average house prices have risen by 11.5% to £294,260, according to Halifax. But they have risen only 0.2% since June, according to the bank.
A summer downturn is not unusual, but with the economy prone to recession and the long period of ultra-low interest rates coming to an end, there are concerns that the downturn could last well beyond a few months.
Homebuyers have faced the added hurdle of soaring mortgage rates, even as their savings on deposits are threatened by the rising cost of living.
“There are now signs that buyers in some regions are becoming more cautious about excessive valuations, taking note of rising inflation and interest rates and making the most of available mortgage deals or reassessing their timeframes” , said Winkworth Chairman Simon Agace.
The government’s flagship housing scheme, the Home Buyer’s Equity Loan, is also withdrawn, dealing another blow to homebuilders, and developers have clashed with ministers over plans to tax the sector to finance the repair of buildings with defective coatings or other fire safety measures. risks.
With inflation expected to hit around 20% next year, economists expect interest rates to rise further as borrowing costs do not return to past levels for the foreseeable future.
Despite the growing risks, one big bright spot for the sector remains: housing is chronically undersupplied in the UK.
“The market has been affected by all of the above,” Thomas told Barratt. “But take a step back and look at the fundamentals: one of the main drivers of house price inflation over the past 20 to 30 years has been a lack of supply.”