While this isn't necessarily cast-iron proof that a market collapse is on the horizon, it is clearly a sign that the pandemic-fuelled double-digit price hikes are coming to an end.
Robert Gardner, Nationwide's Chief Economist, comments: “October saw a sharp slowdown in annual house price growth, to 7.2% from 9.5% in September. Prices fell by 0.9% month-on-month, after taking account of seasonal effects, the first such fall since July 2021 and the largest since June 2020.
“The market has undoubtedly been impacted by the turmoil following the mini-Budget, which led to a sharp rise in market interest rates. Higher borrowing costs have added to stretched housing affordability at a time when household finances are already under pressure from high inflation.
“For example, the increase in mortgage rates meant that a prospective first-time buyer (FTB) earning the average wage and looking to buy a typical FTB home with a 20% deposit would see their monthly mortgage payment rise from c.34% of take-home pay to c.45%, based on an average mortgage rate of 5.5%. This is similar to the ratio prevailing before the financial crisis.
“The market looks set to slow in the coming quarters. Inflation will remain high for some time yet and Bank Rate is likely to rise further as the Bank of England seeks to ensure demand in the economy slows to relieve domestic price pressures.
“The outlook is extremely uncertain, and much will depend on how the broader economy performs, but a relatively soft landing is still possible. Longer-term borrowing costs have fallen back in recent weeks and may moderate further if investor sentiment continues to recover. Given the weak growth outlook, labour market conditions are likely to soften, but they are starting from a robust position, with unemployment at near 50-year lows.
“Moreover, household balance sheets appear in relatively good shape with significant protection from higher borrowing costs, at least for a period, with over 85% of mortgage balances on fixed interest rates. Stretched housing affordability is also a reflection of underlying supply constraints, which should provide some support for prices.
Energy costs update
“The government’s ‘Energy Price Guarantee’ means a typical UK household will now pay an average of £2,500 a year on their energy costs until next April. This is c.£1,000 a year below Ofgem’s previously announced price cap, which was due to take effect from 1 October and will help shield households from the soaring cost of energy on wholesale markets.
“Despite this intervention, energy costs are still going to be around 80% higher than a year ago, even after taking into account the £400 energy support scheme discount. It is important to note that the cap is on the unit price charged to consumers, rather than the maximum bill a household can be charged. Running costs for less energy-efficient properties tend to be considerably higher, leaving these households particularly vulnerable to price rises.
“Average energy costs for the most energy efficient properties (those rated A-C as reported on energy performance certificates) are expected to rise to c.£1,800 per year, compared with around £1,000 a year ago.
“Typical bills for D-rated properties (the most common type) are set to rise to £2,600 a year. Those in E-rated properties will be paying around £120 a month more than last winter. However, those living in the least efficient properties (rated F-G) will see average bills rise to c.£4,500, an extra £185 a month compared with a year ago, though these properties make up a small proportion (c.2%) of the stock of housing with a mortgage.
“The cost-of-living crisis is set to disproportionately affect lower-income households as they spend a higher proportion of their income on essentials (food, gas and electricity). Lower-income households are also much less likely to have accumulated savings, so they will find it more difficult to cover the increase in these costs.
Nathan Emerson, Chief Executive of Propertymark, comments: “Agents are reporting more homes for sale coming to the market, giving buyers more choice than they have had over the past two years. They no longer have a fear of losing out on a property and can therefore be more level-headed with the offers they're putting forward, which will naturally see a softening in prices being achieved over the next few months."
Marc von Grundherr, Director of Benham and Reeves, commented: “Any market slowdown is likely to strike fear into the hearts of the nation’s homeowners, but a reduction in the rate of house price growth should be largely welcomed.
"The monumental levels of house price appreciation seen throughout the pandemic market boom just simply aren’t sustainable and it’s far better the market steadily returns to normality, rather than crashing back down to earth with a bump."
Chris Hodgkinson, Managing Director of HBB Solutions, commented: “All current signs point to a housing market running dangerously low on steam, with buyer demand starting to fade, while dangerously over-inflated house prices can no longer maintain the trajectory of the last two years.
"With many buyers also being hit by increasing mortgage costs, we can expect a turbulent few months ahead, as sellers struggle to achieve their desired asking price, leading to a raft of sales falling through.”
Jonathan Samuels, CEO of Octane Capital, commented: “We’re now starting to see the level of buyers entering the market return to pre-pandemic levels and this drop in demand will inevitably impact the level of house price growth being seen across the UK market.
"At the same time, the average cost of repaying a mortgage is now at its highest in over a decade and this will also impact house prices, with prospective buyers no longer able to stretch to the same house price heights seen over the last two years.
"As a result, the housing market will start to cool as we approach the end of the year, but it’s unlikely we will see a property market crash, rather a softening of the curve.”
Matthew Thompson, Head of Sales at Chestertons, says: “October’s property market was very much dictated by the avalanche effect of September’s Mini-Budget announcement. Buyers were facing the reality of higher interest rates and mortgage providers withdrawing a number of products, which created a new sense of urgency. This has led to house hunters rushing to finalise their purchase, resulting in a 53% increase in the number of exchanges compared to October last year.”
“Despite economic uncertainty, buyer demand seemed undeterred as our branches registered the same volume of enquiries as in October 2021. This shows yet again that, compared to the national picture, London’s property market has its very own rhythm and remains a key destination for buyers and investors alike.”
Tom Bill, head of UK residential research at Knight Frank, said: “Mortgage market volatility that followed the mini-Budget caused prices to fall in October and we expect downward pressure to persist despite the steadying effect of a new government. Demand will come under more pressure next year as a growing number of people come to the end of fixed-rate deals and mortgage offers made earlier this year when rates were lower begin to lapse.
"Government stability will help underpin transactions but we are witnessing a fundamental shift in rates take place after 13 years of ultra-low borrowing costs that will lead to price declines. Low unemployment, tight supply and well-capitalised lenders mean we should avoid the kind of double-digit falls seen during the financial crisis.”
