RICS: Resilience of housing market could be tested if mortgage rates climb

The housing market finished last year on a “firm footing”, with a rise in house sales and new buyer enquiries, according to the latest Royal Institution of Chartered Surveyors (RICS) survey.

House prices increased in every region of the UK last month, with Northern Ireland and Scotland reporting the strongest price growth.

The RICS survey, which polls estate agents and other property professionals, recorded an upward trend in house sales, with +5% (net balance) of respondents reporting an increase in new buyer enquiries.

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New instructions, which measures properties placed for sale, saw a bounce, potentially due to stamp duty changes in March, with a net balance of +14%. This is the sixth consecutive month where respondents have indicated an increase in houses being listed for sale.

The strong housing market is echoed in Nationwide’s house price index, which said house prices rose 4.7% last year, with a 0.7% monthly uplift in December.

According to the Land Registry, UK house prices grew 3.3% in the 12 months to November.

However, Halifax’s index showed a dip in property prices last month, with a 0.2% month-on-month fall.

Simon Rubinsohn, chief economist at RICS, said the RICS survey “points to a further improvement in sentiment in the housing market”, adding: “The signals around expectations over the next 12 months also remain solidly positive for now.”

However, he admitted that rising mortgage rates was a headwind. While the positive outlook from RICS respondents was “despite concerns about the potential impact of rising bond yields on borrowing costs”, Rubinsohn warned that “the resilience of the uplift in market mood could be tested if mortgage rates do begin to climb in a material way over the coming months”.

Rising mortgage rates pose a challenge…

Experts agree that the biggest headwind for the housing market is an increase in mortgage rates. The bond turmoil has resulted in some lenders putting up their rates. For example, TSB is hiking some of its mortgage rates tomorrow (17 January), and Coventry Building Society, Skipton, Leeds Building Society and Virgin Money have already increased some of their deals.

The average two-year fixed mortgage rate today is 5.5%, according to Moneyfacts, up from 5.47% a week ago. The average five-year fix is 5.29%, up from 5.25%.

Tom Bill, head of UK residential research at Knight Frank, comments: “Demand will come under more pressure as the impact of higher borrowing costs feeds through into mortgages. Financial markets are often more volatile in January and President Trump’s inauguration has added to the instability in debt markets this year, intensifying the mortgage pain caused by the Autumn Budget.

“Cracks have appeared in the UK housing market since October but what Labour does next will dictate how wide they grow.”

A big rise in mortgage rates would be a big headache for first-time buyers and those remortgaging. But Rubinsohn points out that it would also be “a concern for developers who will want to see a solid market as a backdrop for ramping up housebuilding to help meet the government’s ambitious 1.5 million homes target for this parliament”.

…but the stamp duty deadline should boost activity

The upcoming stamp duty deadline should keep the housing market fairly buoyant for the next few months.

The tax-free stamp duty threshold will revert from £250,000 to £125,000 on 1 April. For first-time buyers, the threshold will fall from £425,000 to £300,000.

Tomer Aboody, director of specialist lender MT Finance, comments: “We are likely to see a big push in activity in the first quarter as buyers take advantage of cheaper stamp duty, rather than put plans on hold yet again in the hope of further reductions [to mortgage rates] which may not materialise for a while."

The consultancy Capital Economics is optimistic about house price growth this year, partly due to the temporary boost from buyers rushing to complete deals before the expiry of the increase to the nil-rate stamp duty thresholds on 31 March.

It is forecasting a 3.5% increase in house prices this year, and 4.5% in 2026.

What’s happening in the rental market?

In the lettings market, the RICS survey said that tenant demand had stabilised however, respondents expect further rent rises (+37%), likely due to a continued trend of landlords placing their properties for sale (net balance +37% in December, from +29% in November).

So, while demand is broadly flat, supply is diminished, leading to a lack of available property to rent and price rises.

According to Jeremy Leaf, north London estate agent and a former RICS residential chairman, landlords are still leaving the market when tenancies end due to concerns about the consequences of the soon-to-be introduced Renters’ Rights Bill, “which will make it harder to remove disruptive or non-rent paying tenants”.

Interestingly, he says that some rents rose so far and fast at the beginning of last year that "we are often struggling to match those figures when the same properties become available now".

Leaf adds: "Nevertheless, shortage of stock, particularly of smaller one- and two-bedroom flats, has kept rents higher than they might have been – a trend which is likely to continue for the next few months at least.”