Kristy Dorsey: Falling house prices will bring renters limited comfort

Lloyds – the UK’s largest mortgage lender – suffered a decline in third quarter profits as it set aside an extra £668 million to cover an anticipated spike in loan and mortgage customers defaulting on their debts. The group, which owns the Bank of Scotland, said the worsening economic outlook is likely to trigger an 8 per cent fall in house prices next year.

It was the turn of NatWest the following day as the owner of Royal Bank of Scotland predicted a slightly more temperate 7% decline across the UK market. It too set aside extra cash for bad debt provisions, leaving its third quarter profits flat.

The release of today’s monthly house price index from Nationwide may shed a little light on when the economic headwinds will begin pushing valuations into reverse, but there is no doubt that it’s coming. The era of dirt-cheap home loans that has reigned for well more than a decade is at an end, and with it goes the primary source of oxygen that has stoked housing prices.

READ MORE: Decline in mortgage approvals bolsters predictions for falling house prices

The combined impact of higher borrowing costs and record-setting rates of inflation was evident in yesterday’s data from the BoE which showed that mortgage approvals for home buyers fell significantly in September, down 10% from the previous month at 66,800. Furthermore, approvals look set to drop much further as financial constraints knock the stuffing out of demand.

Latest data from Moneyfacts show the current cost of the average two-year mortgage is sitting at just under 6.5 per cent, pegging monthly payments at about £1,500 against little more than £900 two years ago. Many would-be buyers are simply locked out at those sorts of levels.

Senior UK economist Gabriella Dickens at Pantheon Macroeconomics said timelier measures are also going down, with the latest RICS residential market survey at levels consistent with mortgage approvals falling below 50,000 per month.

“In addition, Google Trends data show that the number of people visiting property websites has reverted to pre-Covid norms, having been around 30% above at its peak,” she said. “All told, we expect house purchase mortgage approvals to average just 55,000 per month in 2023, the least since 2012.”

The only real question is how large the resulting drop in house prices might be, as expert opinion on this varies considerably. Estate agency JLL is at the lower end of the range at 6%, while RSM is currently predicting a 10% decline. Senior property economist Andrew Wishart at Capital Economics believes the market will be down 12% by the middle of next year.

READ MORE: NatWest says house prices to fall next year

Unfortunately, the magnitude of the forthcoming market correction will be of little consequence to renters who are also having a tough time while many eyes are locked on mortgage rates and house prices.

Buy-to-let investors in this country were already passing on the cost of higher interest rates to their tenants before the Scottish Government’s rent freeze took effect last month, and will resume doing so if this temporary measure is not extended beyond the end of March. Yet property owners have warned that many landlords will sell up if the freeze continues, further reducing the already constrained supply of rental accommodation.

Lower supply and higher demand is the perfect storm for renters in a market where there is already a shortage of affordable and efficient housing.

Figures from the Scottish Government show new home completions remain below pre-Covid levels, with 20,767 properties built in the year to the end of March, down from 24,868 two years earlier. New starts are also adrift of levels seen in the years immediately prior to the pandemic, with the biggest declines in the social housing sector.

Building work on local authority-owned housing has held fairly stable, albeit at low levels, but new build approvals for housing associations are down substantially. The 2,755 approvals during the 12 months to the end of June – the most recent figures available – were 52% lower than in the same period to the end of June 2020, and 40% lower than that to June 2019.

READ MORE: Profits down as UK’s largest mortgage lender prepares for falling house prices

By comparison there were 14,075 new starts in the private sector during the 12 months to the end of March, the most recent figures available for this segment of the market. That was down by a more modest 18% on the same period two years earlier.

This lack of supply in Scotland has been accompanied by higher increases in rental prices than elsewhere in the UK. According to rental platform Ocasa, the nominal price of rent in Scotland is 13.6% higher than a year ago and almost 40% higher than five years ago. Even after adjusting for inflation, rent in Scotland is 2.9% higher than a year ago.

Approximately 1.7 million people in Scotland live in rented accommodation, but those who might want to own their own property are stuck in a Catch-22 where increasing rental costs make it difficult to save for a deposit. Anything to be gained from a fall in house prices has already been consumed by inflation.

This has further longer-term implications, with research from Hargreaves Lansdown showing that just 16.3% of workers who rent can expect at least a “moderate” retirement income, compared to 57.7% of those who own their own home.

“The traditional view is that you enter retirement with your mortgage paid off which means your income needs are lower,” pensions analyst Helen Morrissey explained.

“Renting into retirement undoes this idea as money needs to be found for rent throughout. This pushes up day-to-day retirement costs and means much more needs to be saved for retirement to account for this.”