Speaking on a Kensington Mortgages webinar, Richard Donnell, executive director for research at Zoopla, said that the firm expected average mortgage rates, specifically five-year fixed rates at 75 per cent loan to value (LTV), will start at less than five per cent next year.
He said: “Lenders are going to compete, the swap rate has come down. I don’t think it will necessarily get to four per cent by the end of next year, but 4.5 per cent to five per cent is much better position than 6.5 per cent.”
He did warn, however, that higher mortgage rates did dent buying power in the market.
He compared the different amount a person could borrow if they wanted a £825 monthly payment and a 75 per cent LTV mortgage.
At a two per cent mortgage rate, someone could borrow up to £193,500, but this falls by 11 per cent to £172,584 at three per cent, and by 20 per cent to £154,833 at four per cent mortgage rate.
At five per cent, the amount someone can borrow contracts by 28 per cent to £139,687 and by 35 per cent to £126,698 at six per cent mortgage rate.
Donnell said: “In the face of higher mortgage rates, people might have to look at cheaper areas, put in more equity or allocate more income to mortgage payments but there is only so far that high street lenders will let you do that.”
Donnell added that the spike in mortgage rates from two per cent to around six per cent had created an “on paper overvaluation of property” similar to levels seen in 2007.
Differences in the market between 2007 and now
However, he said that there were a “lot of differences” between the housing market in 2007 and now.
He explained that one factor was credit, noting that previously “there wasn’t any credit or very limited credit”, but banks now were well capitalised and had more “potential to lend” next year than they did in 2009 and 2010.
He said: “We think this on-paper overvaluation of housing caused by high mortgage rates can unwind by rates falling from six and a half per cent back towards four per cent if that’s also accompanied by a five per cent fall in prices. That’s how overvaluation unwinds so it’s not a huge shock to the housing market to make housing more affordable.”
He said that if mortgage rates remained at six per cent for the whole of next year that house prices would not fall back as quickly and would “increase the risk of bigger falls”.
Tougher in London and the South East
Donnell continued that in London and South East, affordability was not only “acting as a drag on house price growth but also activity” and higher mortgage rates would have the biggest impact in these areas.
Donnell said that in these areas, you would need an average household income of £60,000 to £80,000 to purchase an average property with a 75 per cent LTV mortgage borrowing at 4.5 times income.
“Higher rates will compound that meaning people need to put more equity in or look to move elsewhere to get better value for money.”
He added that he expected property transactions to come to around 1.3 million this year, which he said was above the 50-year average of 1.2 million and predicted that this would likely drop to around one million next year.
Donnell concluded that there would still be “drivers” pushing people to move home, such as desire to work from home, increased retirement, cost of living pressure making people re-evaluate their homes and pace at rents would push renters into buying “potentially earlier than they might have planned”.
“I think homeowners have got to give up these pandemic price gains, a lot of people made a lot of money out of their homes who were already homeowners in the last two or three years. There is room for people to still be able to move but they’re going have to give up some of those gains.”
Consolidation in buy-to-let space will continue
Donnell said that the rental market was “really important”, and a key challenge was that there had been so much growth in stock since 2016.
He explained: “We’ve seen landlords go slower on net new investment, so private landlords selling up or rationalising their portfolios or selling a property to pay down debt or a property that is expensive to run. But the people exiting the market have been offset or matched the pace at which new entrants have come into the market.
“We’re seeing new arrivals coming into the market. We’re seeing a lot of corporate investors coming in, as well as institutions and other types of investors.”
Donnell added that the number of rented homes had doubled from around 2.5 million in 2002 to 5.4 million in 2016, but it had stayed stagnant since then and stood around 5.5 million in 2021.
He added: “I think this consolidation sadly is going to continue, so we are going to continue to see investors come into the market but there are a lot of headwinds to that. But there is still a really strong case for having buy-to-let or rented property as part of a balanced portfolio for the right type of landlord.”
He added that there was stronger demand for rental property, partially due to scarcity and higher mortgage rates, which would “trap more renters in the in the rental market, which boost demand even more” and consequently rental prices.
Donnell said that annual rental growth in areas like London and Manchester for new rents had been as high as 16 per cent.
He noted for existing renters already in a tenancy, the increase was closer to two or three per cent.
He continued: “That’s encouraging a lot of tenants to stay put, not moving which is adding to the supply problem. But the underlying story is the cash flows from renting are going to be strong.”
“I think new investors are going to focus on cash flow rather than house price growth,” he said.
He added that he expected rents to rise by four to six per cent next year as the supply demand imbalance keeps rents higher and supports cash flows.
