The UK housing market saw a dip in confidence in May, according to the latest survey from the Royal Institute of Chartered Surveyors (RICS).
House prices and buyer confidence are partly driven by mortgage rates, which are linked to the Bank of England’s underlying base rate. Hopes for an interest rate cut have been pushed further out on the horizon in recent months, dampening short-term sentiment in the property market.
Many had been hoping for a June cut, but April’s inflation figure came in higher than economists were expecting. Core and services inflation proved particularly sticky, and wage growth is still coming in strong too.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Get 6 issues free
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Against this backdrop, an August or September rate cut is now looking more realistic – particularly with a general election having been called for 4 July. The Bank of England will want to avoid its decision being politicised, and is likely to hold rates at their current level of 5.25% on 20 June.
This is bad news for the property market, as mortgage rates continue to create affordability barriers. This backdrop is reflected in the latest RICS survey results. Property professionals reported a drop in buyer demand in May, as well as a slight fall in house prices in England.
With this in mind, we take a closer look at the UK housing market. Will the long-term outlook prove brighter once interest rates fall, and is now a good time to buy or sell a house?
Confidence drops in UK housing market
Each month, RICS asks its members (agents and surveyors) a list of questions to gauge their mood on the property market.
Using their responses, it generates a percentage balance figure on key metrics such as house prices, buyer demand, and the volume of new property listings. A figure below zero indicates more respondents have responded negatively than positively.
The latest RICS survey reveals a wobble in market confidence in May. New buyer demand fell to a net balance score of -8%, down from -1% in April. This is the worst reading since November last year. Meanwhile, the number of sales agreed fell to -13%, down from +4% in April.
“The recent recovery across the UK housing market appears to have slipped into reverse of late,” says Tarrant Parsons, senior economist at RICS. He puts this down to the upward moves seen in mortgage rates over the past couple of months.
While mortgage rates have stabilised from their highs last summer, the market remains volatile. Average mortgage rates on two and five-year fixed-rate deals crept up by 0.02% in May, according to Moneyfacts. In April, rates rose by 0.1%.
Rate cuts should boost the UK housing market
Confidence has taken a wobble in the short term, but the good news is the long-term outlook is more positive.
Sales volumes are expected to rise modestly over the next three months, with RICS respondents posting a +6% net balance score (up from 0% last month). Over the next 12 months, respondents posted a +43% score (up from +33%).
Parsons says this optimism is “likely predicated on the Bank of England being able to start lowering interest rates in the coming months”.
House prices typically rise when interest rates are cut, as affordability constraints loosen and buyer demand picks up. This is something to keep an eye on if you are thinking about the best time to buy or sell your house.
That said, mortgage rates are expected to remain significantly higher than those seen towards the end of the 2010s. This, coupled with higher house prices, could continue to create a barrier to entry for first-time buyers.
“Generally, first-time buyers can only borrow up to 4.5 times their annual income, meaning those on average salaries can only secure mortgages slightly over £150k,” explains Karen Noye, mortgage expert at Quilter. This “doesn’t offer much choice in the current market,” she adds.
What’s going on with house prices?
The first question the RICS survey asks each month is: “How have average prices changed over the last three months?” In May, this question gathered a net balance score of -5%, indicating a slight fall in prices.
It is important to remember that RICS results are based on sentiment rather than actual house price data – however the power of sentiment in driving markets should not be underestimated.
The results do not vary widely from region to region in England, where “virtually all parts of [the country] returned either a flat or marginally negative reading.” Meanwhile, there was an upward trend in both Northern Ireland and Scotland.
That said, all major house price indices are currently showing an uptick on an annual basis. Prices rose by 1.8% in the 12 months to March, according to the Office for National Statistics. Meanwhile, Halifax data suggests prices rose 1.5% in the year to May, while Nationwide data points to a 1.3% rise.
Is now a good time to buy or sell a house?
The latest RICS data reveals a slowdown in buyer demand – but this doesn’t seem to be stopping sellers from coming to the market. “The volume of fresh instructions coming onto agents’ books has now improved for six consecutive months,” RICS reports.
This is supported by the latest data from Zoopla, which reveals UK property supply hit an eight-year high in May. A mismatch between the number of buyers and sellers could mean it’s a buyer’s market.
Whether buyers are able to take advantage of this will depend on how they are planning to fund their purchase. First-time buyers or those who have to remortgage could find themselves being priced out by higher mortgage rates.
The good news is that both major political parties have promised a string of measures to help first-time buyers, if they win the general election.
Keir Starmer, who launched the Labour Party manifesto today, has promised to get 80,000 more young people on the property ladder by the next parliament. His party plans to do this by introducing a permanent version of the existing mortgage guarantee scheme, which is currently due to expire in June 2025. The party has also promised to build 1.5 million new homes.
Meanwhile, the Conservatives have promised to permanently scrap stamp duty for first-time buyers up to a threshold of £425,000. They have also promised to launch a “new and improved Help to Buy scheme to provide first-time buyers with an equity loan of up to 20% towards the cost of a new build home”.
We will be keeping tabs on these general election policies, including what they could mean for the property market, in the weeks to come.
The five insurance policies you should have
Is Donald Trump putting the US dollar in danger?
