Why haven’t higher mortgage rates caused home prices to drop?

When mortgage rates began to skyrocket in the final months of 2022, many expected home prices to fall sharply.

Simple logic assumed that higher borrowing costs would mean buyers couldn’t afford the same mortgage as before, and therefore prices would plummet.

But real estate prices have not fallen. Instead, they have stagnated.

Average house prices have fallen just 2.1 per cent since reaching a September 2022 peak of £288,901, according to official Land Registry figures.

In March this year, they stood at £282,776, just £6,000 less than the all-time high.

Both Nationwide and Halifax also report only modest falls in house prices based on their own mortgage lending data.

Nationwide says house prices are 4 per cent below the peak recorded in summer 2022, taking into account seasonal effects.

Meanwhile, Halifax says prices have fallen just 1.6 per cent at the summer 2022 peak, falling from a high of £293,507 to £288,949 in April this year.

Why has this happened and how can homeowners afford these higher mortgage costs?

we spoke with Aneisha Beveridgehead of research at Hamptons real estate agency, Samuel MitchellCEO of Purplebricks, Antonio Codlinghead of European housing for investment bank RBC Capital Markets, and Andrew Wishartsenior economist at Capital Economics, to find out.

Aneisha Beveridge – head of research at Hamptons

Mortgage stress tests and fewer mortgaged homes

Aneisha Beveridge says mortgage lenders are now stricter about how much money they will lend, meaning more homeowners can keep up with their payments even though they have increased.

“A key factor has been the absence of forced sellers,” he says. “The stricter stress tests introduced after the 2008 crisis have provided a safety net for the 7.2 million households with mortgages.”

‘This ensured that most homeowners who refinanced last year had already been stress tested with higher rates and could absorb the increased cost.

‘This evidence, together with the long-term decline in the number of mortgaged homes, means there have been very few forced sellers.

“More than half, or 54 per cent, of homeowners in England now own their property outright, up from 46 per cent in 2008.”

The mortgage letter

Mortgage statutes were a set of guidelines agreed between the Government and many mortgage lenders, detailing the additional support they would offer customers when rates began to rise.

Beveridge says: ‘For households facing financial difficulties, mortgage statutes offered a lifeline by allowing them to transition to interest-only mortgages or extend the term of their mortgage to reduce their monthly payments.

“Although the number of people taking up the option was relatively low, it helped prevent foreclosures and a flood of homes entering the market, which could have quickly put downward pressure on home prices, as seen after 2008”.

Reducers maintain momentum

‘House prices also reflect people who move, rather than those who don’t. In 2023, the property market was driven by buyers who could afford to move, which kept upward pressure on prices,’ Beveridge.

‘The downsizers, who have built up substantial equity in their properties, were particularly active.

‘Meanwhile, upsizers, who found it expensive to move with higher mortgage rates, were left on the back burner, waiting for rates to come down.

Sam Mitchell – head of Purplebricks

Property is a necessity.

Sam Mitchell says property prices don’t behave in the same way as prices of other things, because selling is stressful and expensive.

“Last year was especially tough for housing, and yet prices didn’t go down much,” says Mitchell.

‘This is because property does not behave like more liquid assets. If you think that the price of oranges is going to go down and the price of bananas is going to go up, you sell oranges and buy bananas.

‘If you think house prices are falling, you’ll still need somewhere to live.

‘A house is a home, so people tend not to sell it rather than rent it and then buy it again, especially considering the high transaction costs, risk and stress associated with moving.

People are sitting on their hands.

When the housing market is uncertain, more people tend to sit still and do nothing, which is not reflected in the house price figures.

Mitchell says: ‘If people think values ​​may fall, they tend to sit tight until prices recover, so transactions are affected much more than prices.

‘This was particularly true in the second half of 2023, when transactions fell significantly.

“In 2024, we will see green shoots of confidence, mortgage approvals will begin to creep up – albeit from a low base – and there is a window of opportunity to make progress before the inevitable market shutdown when the election begins.”

There are still many buyers

“Positive buyer sentiment and a general improvement in market confidence also continue to drive activity and preserve the stability of the housing market,” adds Mitchell.

‘Purplebricks is experiencing an increase in viewing activity and there has also been an increase in new market offerings which have resulted in more sales.

“The Bank of England announced earlier this month that mortgage approvals are at their highest level in 17 months, a positive trend that people will likely look to take advantage of.”

Anthony Codling – investment bank housing analyst

Many homeowners do not have a mortgage

Anthony Codling argues that the vast majority of homeowners are not as affected by higher mortgage rates as we are led to believe.

It says: ‘More people own their homes than buy with a mortgage, and we estimate the average loan-to-value ratio across the housing market is around 25 per cent.

‘The amount moving companies borrow is probably less than you imagine. Therefore, the average homeowner’s finances are less sensitive to mortgage rates than one might think.’

The Bank of Mom and Dad continues with donations

Codling says borrowing from parents remains an important factor in helping first-time buyers get on the ladder.

“The Bank of Mom and Dad is alive and well,” he says. ‘The average deposit for a first-time buyer is equivalent to a year’s salary, before tax, and the average deposit for a first-time buyer is around 25 per cent.

“Those who buy their home without the help of their parents are in the minority, and the desire of parents to help their children (or grandchildren) buy a home is greater than current mortgage rates.”

Of course, there are buyers who will feel they can’t afford to borrow as much as before due to higher mortgage rates, but Codling maintains that they tend to simply compromise on size or location rather than delay their plans entirely.

People keep moving, just to cheaper houses

“Size is important,” says Codling. ‘We tend to see that if someone wants to move and feels secure in their job, they tend to move.

‘The mortgage rate affects where they move to and the size of the house they buy. This means we see home buyers finding a home priced to suit them, rather than waiting for the price of an unaffordable home to drop.

“For example, if a baby is on the way or a child is starting school, it is more important to buy a home by a certain date than to wait to see housing prices.”

Andrew Wishart – senior economist

Strong wage growth

According to Wishart, rising wages and the relative health of the labor market have also helped people continue buying homes.

‘While house prices only fell 5 per cent in nominal terms (at the height of the mortgage rate increases), they fell 15 per cent in real, i.e. inflation-adjusted, terms.

“Wages have ultimately risen by the same amount as consumer prices over the past two years or so, so buyers have more income, which has helped them afford higher mortgage payments.”

Longer mortgage payment terms

“The amount buyers can borrow, together with their deposits, decides how much they can afford to pay for a house,” adds Wishart.

‘Spreading payments over much longer periods, 35 to 40 years instead of 25, has kept large mortgages affordable even though mortgage rates are higher.

‘For example, a £200,000 mortgage with a 25-year term cost £845 a month when mortgage rates were 2 per cent, and rose to £1,170 with a mortgage rate of 5 per cent.

“But extending the term to 40 years reduces the payment to £965 a month.”