I try to summarise any latest developments on this crucial subject. Property values matter to us all and a fully functioning property market is an essential part of the Northern Devon Economy. The latest clues as to what will happen next are at best confusing.
Let me explain why this is such a puzzle before trying to reach any conclusions.
House sales increased in October to 100,410, a 21% increase from October 2023 and 10% higher than in September.
Mortgage approvals are currently at a two year high – 68,300 in October the highest since August 2022. There was also an increase for the third consecutive month in remortgage approvals with 31,400 moving their mortgage to a different lender.
There was a simple explanation for this because purchasers were concerned about the likelihood of reductions in Stamp Duty thresholds and sellers‘ fears regarding increases in Capital Gains Tax. In the event the Chancellor imposed a 2% surcharge on the purchase of second homes (leading to a frantic scramble to get deals done before the midnight deadline).
The budget has also triggered an increase in activity with First Time Buyers, in the most expensive areas, anxious to complete a purchase before March 31st 2025. From the 1st April 2025 the starting point for them drops from £425,000 to £300,000 – a likely increase in costs of £6,300 average.
There was also a trend towards cheaper mortgages with costs falling between May and October with the effective rate falling to 4.61% in October the lowest since May 2023.
Despite this, the prevailing overall mood is gloomy with slow sales and limited enquiries. The general trend is that the current slower house price inflation is making a home more affordable. The average house price has risen 3.8% over the last 12 months to £282,508. During this same period annual earnings have risen by around 5% to an average of £44,667. This means that the house price to income ratio has dropped to 6.55 times annually earnings from a high in the post pandemic boom of 7.22.
The predicted trend for house prices is that they will continue to rise next year by at least the average rise seen over the last 12 months. Also that there will be 1.15m transactions next year, a rise of 5% higher than this year.
All this sounds promising for buyers, sellers and those who build houses. Life however is never that simple.
The trend of mortgage costs has been downward with a 5 year tracker at 4.64%, down from 5.39% this time last year. For a two year fix the average rate is 4.95% compared with 5.85% last year.
Following a fall in Bank of England Base Rate of 0.25% to 4.75% and an expectation of further cuts over the next 12 months, it is reasonable to assume cheaper mortgages and borrowing costs. In reality however half of existing UK mortgage holders could see their payments increasing over the next 3 years. It is estimated that 4.4m mortgages will see payments rise by 2027 with a £500-per-month hike for around 420,000 households. Against this, 25% of borrowers can expect a fall and 23% will see no change.
The Financial Markets are driven by many complex factors, not just Base Rate. Rate setters are currently seeing increasing risk from Ukraine, Middle Eastern conflicts, cyber threats, potential impact of US Tariffs and concerns about the overall level of UK debt and the increasing cost of servicing this. They do not currently trust the Government’s growth targets.
More than one million mortgages issued in the past 3 years will see borrowers still repaying into their pension age. This prospect means many not getting onto the property ladder and being forced to rent until later in life. The proportion of those renting doubled in the 2000s and is now about 20% of the total. Around 11% are still reliant on rent into their late 50s and early 60s.
The Government has promised to hit the housing problem on the head by setting new building targets – 1.5m new homes in next 5 years, a radical review of Planning Policy and delivery and support for the house building industry.
The industry, however, does not recognise these new targets as realistic. They are still faced with multi-year planning delays, significant lack of new employees with the necessary skills, increased minimum wages and National Insurance costs, new regulations which are increasing their basic costs, (such as payments of around £9,000 per dwelling for environmental works and around £5,000 for installing heat pumps instead of normal gas and electricity connections). There is also a growing concern regarding the potential imposition of a £3bn cladding (building safety) levy which would be charged as a percentage of the sale value of each new development. This makes the prospects for increased housing delivery anytime soon a more distant prospect.
I apologise now to those who hate lots of numbers – hopefully there are some who love them – but they help to highlight the problems.
Importantly where does this mean the housing market is going?
We are currently at a crossroads and probably a low point. Things should therefore get slowly better. The Government have no choice but to attack the planning system. The result of improving construction is that this is the quickest way to kickstart their growth programme by creating jobs, economic activity and improving social wellbeing. They are being super optimistic about other economic growth opportunities, housing will therefore become a top priority.
Interest rates will drift down as money markets see less risk and become more competitive in the highly lucrative mortgage markets. The rental market will continue to grow with more major institutions investing to replace the current “cottage industry”. This will be motivated by strong prospects for rental growth. House Builders will slowly increase production encouraged by better planning certainty and greater control of cost inflation. This will be helped by more off-site construction with more (imports of) modular units.
I will stick my neck out and predict that house prices across Northern Devon will increase by 18% between now and Xmas 2028. As ever I am open to being challenged.
