Opinion: falling house prices won’t make homes more affordable

Buying a home isn’t any easier if house price falls are coupled with rocketing mortgage costs.

Demand for new homes has crashed since the disastrous mini Budget - and the chaos it wrought on the housing market - a new report from Zoopla has suggested.

It found that demand had dropped by an enormous 33% since Kwasi Kwarteng’s short-lived spell as Chancellor, and also pointed out that the number of transactions falling through has risen to boot.

It warned that it currently expects house prices to drop by 5% next year, though that is based on the expectation that mortgage rates drop back to around 4% on average.

If they remain around 6%, as they are currently, then Zoopla has suggested we may see “double-digit” house price falls next year.

A chorus of voices

Now, portals like Zoopla and Rightmove aren’t exactly known for being downers on the housing market, so the fact that they are even raising the prospect of such tangible house price drops is notable.

It’s also important to recognise that they are far from alone in these predictions.

In fact, we have seen a growing cohort of forecasters suggest falls ‒ last week NatWest predicted a 7% drop, while Knight Frank has warned of a 10% fall over the next couple of years.

The difficulties of the last month are not being overlooked, and instead viewed as a real downward drag on the value of our homes. 

Will this make home ownership easier?

On the face of it, the thought of house prices dropping somewhat seems like a positive.

The rate of house price growth over the last couple of years has been nothing short of astonishing, particularly given we were in the midst of a pandemic.

According to the latest data from the Office for National Statistics, the average value of a home in August stood at £295,903.

Go back two years, and it was £238,998, or five years and it was £225,738. 

In cash terms, the typical home rising by £70,000 in five years is simply staggering, so taking the edge off of that house price growth should ‒ in theory ‒ make it a little easier for would-be homeowners to get onto the housing ladder.

Our guide to buying your first home has all the info you need to make the process as simple as possible

Give with one hand, take with the other

In practice though, it’s unlikely to be the case.

The mortgage market has undergone an enormous shock over the last few weeks. Lenders across the board pulled their product ranges entirely, relaunching fewer deals, and at markedly higher interest rates.

That repricing is precisely why there are greater numbers of deals falling through.

Borrowers thought they had the financing they need all sorted, only to find that they had not actually secured a formal offer (which lenders will honour), meaning the mortgage will now cost them substantially more each month.

And that repricing also makes it much tougher for aspiring buyers.

For many, it already would have been something of a stretch for their household finances to secure the mortgage they need.

But now, while the amount they need to borrow has dropped, the cost of that borrowing is far higher.

What’s more, the stress tests they need to pass are tougher too ‒ after all, you don’t just have to prove to the lender that you can afford the loan today, but also down the line should rates rise further.

'I need a helping hand'

There are other forces at play which will make borrowing more difficult. The economic situation means that lenders are likely to be even more cautious when it comes to approving home loans. 

If we are heading into a recession, as expected, then it’s likely this will result in an increase in job losses as businesses hit the wall.

Given that, even if you look fine from an affordability standpoint, you still might find it difficult to get the mortgage you need.

Significant numbers of first-time buyers these days rely on help from their loved ones, for example in topping up their deposits.

But given their own finances are now likely to be under pressure, how willing are those parents and grandparents going to be to hand over that cash?

Finally, it’s worth remembering that the Help to Buy scheme ‒ which allowed people to purchase a new-build home with only a 5% deposit ‒ has now closed to new applicants.

While the scheme may have pushed house prices further north, it was at least an option for those looking to get onto the ladder with a modest deposit. 

Falling house prices are only part of the story

Buying a home is incredibly challenging at the best of times, but has become far harder in recent years.

That challenge has become ever greater off the back of the mortgage market upset sparked by the previous Government.

House prices falling will only make a difference to first-time buyer prospects if they are coupled with improved lending conditions. Otherwise, home ownership will remain a pipedream.

Thinking of releasing tax-free cash from your home? This equity release calculator from Fluent Money will show you how much you can expect to get.