Higher borrowing costs poised to curb UK property market - Zoopla

Home buyers could see their buying power slashed by more than a quarter, industry research found on Thursday, as the cost of borrowing continues to mount.

According to the latest Zoopla house price index, UK house price growth remained stable at 8.2% year-on-year in September, despite the rising cost of living.

But the property portal warned that higher mortgage rates were likely to reduce buying power going forward. Its analysis showed that if mortgage rates rise as expected from 2% to 5%, household buying power will be slashed by up to 28%, assuming they want to keep monthly repayments unchanged.

For example, a buyer using a 75% loan-to-value loan to buy an average price home would have mortgage repayments of £825 per month with rates at 2%. To keep repayments at a similar level when rates are at 5%, the buyer would only be able to afford a mortgage that is 28% smaller.

Zoopla said: "This will impact housing demand into 2023 unless buyers put down larger deposits, allocate more income to mortgage costs or adjust their budgets, buying smaller property or looking to cheaper areas.

"We anticipate that higher mortgage rates will have the greatest impact on buying power in high-value markets in London and the south ease, as well as regions such as Wales that have registered the greatest surge in house prices over the pandemic."

The Bank of England has upped interest rates seven times since December, to 2.25%, as it looks to battle surging inflation. Analysts expect rates to continue rising, and especially so following the pound’s post-budget slump. Markets now believe the cost of borrowing will reach between 5% and 6% by summer 2023.

Zoopla also found "early signs" of price sensitivity, with 6% of homes listed for sale having their asking price adjusted downwards by 5% or more in September, the highest level since pre-pandemic.

It noted: "Re-pricing is a seasonal trend as we enter autumn. However, given the economic backdrop and factors including rising energy prices and rising interest rates, we believe this is a clear sign of a return to a more of a buyers’ market after two years of a red-hot sellers’ market."

Richard Donnell, executive director at Zoopla, said: "Measures of housing market activity have been very resilient over the summer. A surge in home values over the pandemic and the rise of mortgage rates means we face a sizeable hit to household buying power of over the rest of 2022 and into 2023.

"While the recent changes to stamp duty are welcome, supporting activity in regional markets and the first time buyer market in southern England, the increase in mortgage rates will erode much of the gains."

Sara Coles, senior personal finance analyst at Hargreaves Lansdown, said: "When the dust settles on the chaos in the mortgage market, the ground will have shifted, and fixed rates will have risen significantly. This is going to take a toll on the market.

"With all the factors conspiring against buyers at the moment, it’s difficult to see how house prices won’t soften from here."