House prices are falling, but here’s why it would be wrong to give up on bricks and mortar

Homeowners can be forgiven for worrying about the news of a slump in house prices, but all is not doom and gloom.

The value of the average home – the largest investment most of us make in our lives – is falling at the fastest rate since 2009, according to Nationwide. On top of that, we have mortgage rates that are close to a two-decade high. The Bank of England stands poised to hike the base rate for a 14th consecutive time on Thursday and it probably won’t be the last.

However, now’s not the time to give up on bricks and mortar. Higher borrowing costs have knocked sentiment and forced buyers to recalculate their budgets, but the property market hasn’t slammed on the brakes.

We’re rapidly closing in on the end of this cycle of rising interest rates. Barring any nasty surprises on inflation, the base rate should peak by September, which will do a lot for sentiment.

Mortgage rates, meanwhile, have already stabilised. Whereas April and May’s hot inflation figures raised the prospect that the UK could be an outlier on inflation among advanced economies, prompting an ugly spike in borrowing costs, June’s reading largely allayed those fears. The smaller, niche lenders began cutting rates in the middle of July, then the bigger institutions followed suit. It was a move they didn’t take lightly – a clear signal of how they view the outlook.

Many clients are asking me whether we can get back to mortgage rates in the 3 and 4 per cent range that we had a month ago, rather than the fives and sixes that we have today. It’s possible if not likely, provided we see two or three more months of positive inflation figures.

That will be particularly important for anybody seeking to get a foot on the housing ladder. The Nationwide data revealed that a prospective buyer earning the average wage and looking to buy the typical first-time-buyer property would see monthly mortgage payments account for 43 per cent of their take-home pay, assuming a 6 per cent mortgage rate. Easing mortgage rates will help, but only to a point. A 10 per cent deposit at current values remains equivalent to 55 per cent of gross annual average income.

Those unable to get on the ladder must grapple with a dysfunctional rental market. Landlords are selling up amid tax and regulatory changes, shrinking the number of properties available to a growing pool of renters. Average rents in London have climbed 30 per cent since 2021 and there are few, if any short-term solutions.

But for homeowners concerned about the value of their largest asset, the outlook is likely to grow increasingly benign. Wage growth, high levels of housing equity, lockdown savings, the availability of longer mortgage terms, forbearance from lenders and the popularity of fixed-rate deals in recent years will all act to cushion the effects of what is likely to be a sustained period of higher interest rates. Analysts including Capital Economics don’t expect the Bank of England to cut the base rate until the second half of 2024.

Some markets and property types will outperform. Values in prime central London, for example, remain 16 per cent below their previous peak and purchasers there are less reliant on debt.

Finally, the declines we’ve seen so far need to be viewed in context. The 3.8 per cent annual decline in house prices reported by Nationwide this week will probably extend to about 5 per cent by the end of the year, according to Knight Frank forecasts. That would leave values 14 per cent higher than they were at the outset of the pandemic.

Simon Gammon is a managing partner at Knight Frank Finance