The last couple of years have seen the most unusual things happen in the UK property market. From an almost complete shutdown in early days of the Coronavirus pandemic in 2020, to frenzied activity and rocketing prices during 2021 and into early 2022.

Supply just couldn’t keep up with demand and competition for every property coming onto the sales market was fierce. Vendors made the most of this and prices rose way above what had been predicted. Although the market has softened, we are still in a situation where there are more buyers than there are homes for sale, so prices are holding, although growth has slowed.

According to the property website Rightmove, at present, the UK average price for a first-time buyer home of two bedrooms, or less, is £224,091. For a typical three to four bedroom home, it is £338,757 and for houses with five or more bedrooms, the average is around £665,304.

August did see prices slightly dip in some areas, but this can’t be said to be a predictor of the start of a downward trend, as August is typically a quieter month in the housing market, when people are more focused on summer holidays than moving house. Indeed, many experts believe that due to the continued lack of supply, prices will remain at current levels, at least for the immediate future.

What factors are likely to affect house prices?

Interest Rate Rise

The Monetary Policy Committee of the Bank of England announced a further interest rate rise of 0.5% yesterday taking the interest rate to 2.25%. The impact of this will be felt most with regard to people’s confidence to move and take on additional debt, as mortgage rates increase, affecting first-time buyers and new borrowers in particular.

Analysis from Capital Economics predicts that the Bank of England base rate will peak at about 3% (possibly higher) in the second half of 2023 which in turn could push average mortgage rates to around 4% or slightly more. Based on this data, they forecast that house prices could fall by 5% in 2023.

It is worth noting that even the higher rates and consequently the cost of borrowing are still low compared with their historical averages, but the impact is exacerbated by continuing worries about inflation and the economy generally.

Cost of Living and Rising Inflation

The current economic client, with the high cost of living, rising energy costs and inflation could see buyers pausing to consider if now is the right time to buy. As interest and mortgage rates climb, many buyers may simply not be able to afford to move in the next year or two. Even with the energy price cap, bills are likely to be double what they were last year, inflation is close to 10% and real wages are falling.

Looking into next year, with consumers’ concerns about the economy, the consensus is that there is likely to be a market correction, with house price growth likely to fall to zero and there could well be a year-long downturn as the interest rate rise really takes effect.

With the prospect of prices falling, many predict that first time buyers, who are critical to the health of the property market, could well decide to wait to see what the market will look like into 2023, rather than taking the plunge now.

Stamp Duty Cut

The cut in stamp duty, announced this morning by the Chancellor of The Exchequer will be very welcome news and will be a positive for the property market, and especially for first time buyers. With effect from today, there will now be no stamp duty to pay on the first £250,000 of a property purchase, instead of the historical £125,000. First time buyers will only pay SDLT on homes over £425,000, up from £300,000,  and first time buyers’ relief is now available on properties up to £625,000, up from £500,000.

The subsequent savings may enable some potential buyers to take their first step onto the property ladder sooner than they would have expected and this increased demand should help to keep house prices steady.

So, is now the wrong time to buy?

The answer is not necessarily. If buyers have sufficient deposit funds and can afford the monthly payments, now is as good a time as any, especially those looking to upsize and buy family homes that they intend to live in for several years to come. There continues to be a shortage of large family homes and as more people continue to work at least partly from home, the demand for space and gardens is predicted to remain strong. This is a trend that seems to be with us for the long-run now and it’s hard to see a time when the hybrid model of working partly from home goes out of fashion.

It’s certainly true that average mortgage payments are higher now than at the start of the year, because of rising interest rates, but over the past decade, average rental payments have risen at a faster rate than mortgage payments. If buyers have managed to save enough for a deposit and can pass the lending criteria, buying a home could still be a more affordable option than renting.

Many people do not realise that over 50% of homeowners are not dependent on mortgage finance. For these lucky people, changes in mortgage rates will not affect affordability and will have little impact on decisions relating to buying property.

In summary, if you want or need to move and can afford it, then now is probably as good a time as any to buy a new home, but only if you plan to live in it for several years. There is little point waiting for a dramatic drop in prices, which may not happen over the next year. Generally speaking, property tends to rise in value over time, so over the long-term you are still very likely to make a profit.

It is also always worth remembering that buying a home isn’t just an investment, it’s first and foremost a place for you and your family to live in; a place where you will be happy and comfortable.