Since the mini-budget in September, the financial markets have been in turmoil. First, we saw the value of the pound drop against the dollar to its lowest-ever value, and gilt yields fell to their lowest level. Following the reversal of the budget, things have started to look more promising.
In the property market, the level of sales activity, according to Zoopla, has held up and has done since. Although interest rates are going up, not all homeowners are affected equally.
Negative equity
Although interest rates are high and we are in a cost of living crisis, the chances of negative equity after such strong post-pandemic growth are low. Over the last two years, we have seen strong market growth, with house prices for all property types and in all regions rising by 10% in the year to March 2022. August showed the first fall in house prices since the pandemic. This means that many homeowners have a strong buffer against house price falls – and new borrowers tended to have more significant deposits against a backdrop of historically low rates when they took out their mortgage. Should house prices fall by 15% from today’s levels, there would still be low levels of negative equity for those who purchased their home up to the start of 2022.
Mortgage rates
The recent reversal of the mini budget has calmed the market. Immediately after the announcement, the pound strengthened, and gilt yields rose (this affects swap rates which is the interest rate that lenders are subject to when borrowing money for fixed-rate mortgages). With this fall in borrowing costs for the government, fixed rates should start to stabilise or even fall. At present, mortgage rates for new borrowers are at around 6.5%, but there are signs that this could be lower over the coming months. Time will tell.
According to analysis from Zoopla, manageable mortgage rates are around 4%, whereas rates of 5% or higher increase the likelihood of regional house price falls and a lower number of property transactions. Inflation is the key driver, which will become more apparent in the coming weeks. Once inflation peaks, the financial markets will be more favourable and reduce the cost of 5-year fixed mortgage rates, which account for over 60% of all new loans.
New sales agreed
Interest from new buyers is starting to fall, and those who haven’t arranged a cheaper mortgage are stepping back to see what happens over the next few months. The rate that sales are being agreed upon is 25% lower than last year but has not stalled, showing there are still committed buyers in the market.
Not everyone has a mortgage
Some 30% of sales are from cash buyers, and a further 20% use a small mortgage to purchase a home. The rising rates mean that they are less likely to move. Over half of all homeowners don’t have a mortgage at all.