It may not look like it, but the UK housing market is cooling off

Recent house price statistics show UK house prices rising. But John Stepek explains why the market is in fact slowing down and what this means for you.

House for sale
Nationwide says that prices in May went up by 11.2% year on year. 
(Image credit: © Getty)

The UK housing market is cooling.

Not that you’d know it from the latest house price data. Nationwide says that prices in May went up by 11.2% year on year.

But that was down a little bit from April’s increase.

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In any case, there’s another bit of data that might be a lot more pertinent…

This piece of housing market data suggests the slowdown is real

If you’re a beleaguered first-time buyer, you may see little to cheer in the latest Nationwide house price data. UK-wide average prices have hit a fresh record high of nearly £270,000. The average home costs 6.9 time earnings, which is also a record high.

Slowdown? What slowdown?

However, what may be more telling is a slightly less prominent housing-related data point: mortgage approvals.

Bank of England data released earlier this week showed that in April, the number of loans approved for new house purchases (as opposed to remortgaging) came in at 66,000. That was down on March’s figure of 69,500. But more importantly, it was also a little bit below the pre-pandemic average.

Now, you could argue that this is just the housing market returning to “normal” levels of activity after the frenzy of the last two years. After all, a combination of lockdown delays, remote-working-driven decisions to abandon the city for the country, and a “petrol on the barbecue” stamp duty holiday have all arguably acted to bring forward house moves and purchases since summer 2020.

But there’s more to it than that. Here’s Gabriella Dickens over at Pantheon Macroeconomics, who sees the mild slowdown in the Nationwide data as “further evidence that buyer demand is cooling, as mortgage rates surge and real incomes fall.”

As we’re always saying, it’s that “mortgage rates” point that probably matters the most. Borrowing to buy a house is still cheap. But it’s a lot more expensive than it was just a few months ago.

For example, notes Dickens, a two-year fix at a 75% loan-to-value (ie a 25% deposit) “jumped to 2.35% in April, from 2.11% in March and 1.29% six months earlier”. That’s the sharpest six-month increase since 2003. Pantheon estimates this two year rate will hit about 2.8% by the end of the year.

Obviously that’s still cheap in historic terms. But what matters in all these things is the direction of travel.

The simple mathematical truth is this: as mortgage rates rise, the amount that homebuyers can afford to borrow to buy a house goes down. In turn, that means prices have to come down.

Pantheon reckon that as a result of this, the house price year-on-year growth rate will slip to around 5% by the end of 2022. That would represent a significant slowdown and of course, it would also represent a fall in “real” (after-inflation) terms.

Why you probably don’t want house prices to crash

Capital Economics has a similar view – Andrew Wishart there thinks that price growth will slow to 8% this year, but that prices will drop by 5% over the course of 2023 and 2024.

What’s interesting is that Wishart thinks this will happen even in the absence of “distressed homeowners being forced to sell their homes… We aren’t expecting a large rise in unemployment, so we don’t anticipate a jump in possessions either”.

Instead, the slowdown will be driven primarily by rising interest rates (which Capital Economics thinks will be a little higher by the end of the year than markets currently expect). “There have been episodes of house price falls without any increase in financial distress, such as the 5% drop in prices in London between 2017 and 2019.”

A cooling housing market is no bad thing. Indeed, it’s a good thing, particularly if it goes hand in hand with rising wages. That would improve affordability while avoiding the damaging scenario of a full-on crash.

A house price crash might sound good to some non-homeowners. The problem is what goes with it. If house prices are crashing, there’s a pretty high chance that you won’t be in a position to take advantage. Why? Because crashing prices imply two things: one, that banks aren’t lending freely, and two, that lots of people are being forced to sell, which implies a very shaky employment situation.

What does this mean for you?

As I always emphasise, if you���re looking for a property to live in, then there is no point in trying to time the housing market. I’ve heard more than a few tales of regret from financially savvy people who thought houses were overvalued 20 years ago and rented in vain.

Like it or not, the UK housing market (in its current manifestation) essentially assumes a norm in which home ownership is the natural end goal for anyone who can afford it. I would prefer a market in which flexibility and affordability for all was the end goal, but that may be idealistic and as an individual, you have to work with the world as it is.

Moving home is stressful enough without trying to second-guess the macroeconomy. So what really matters is the micro-economy – your micro-economy.

If you buy, can you afford to stay put for a while (housing transaction costs are expensive – you don’t want to be moving again in a year)? If you have kids, or you’re planning on it, have you checked out the school situation (do not trust estate agents when it comes to navigating the arcane rules of catchment areas)? Do you have a “margin of safety” – enough money to live on for three to six months if something unexpected happens?

Beyond that – better to hope for a cooling-off period accompanied by an inflation-driven improvement in affordability in the short term. And in the longer term, some sort of changes in taxation and planning laws that encouraged less financial jiggery-pokery on the demand side, and more competition and freedom on the supply side, would be nice (though I won’t hold my breath, as it’s hard to think of two more politically toxic policy areas).

Anyway – Money Morning will be taking a break over the bank holiday weekend. We’ll be back on Monday morning. Have a great weekend whatever you’re doing.

And if you haven’t listened to Merryn’s interview with Fred Harrison on his housing cycle theory and why he reckons we’ll see a crash in 2026 yet – why not give it a listen now?

For more on this topic, see:

Which house price index is best?

The world’s hottest housing markets are faltering – is the UK next?

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.