According to the latest House Price Index by Zoopla, sellers are facing increasing pressure to accept discounts on their asking prices. A significant 42% of sellers are now accepting discounts of 5% or more to secure a sale, marking the highest level since 2018. This trend can be attributed to higher mortgage rates, which have also impacted buyers’ purchasing power, creating a favorable buyers’ market for the remainder of 2023.
The combination of rising mortgage rates and the cost of living has prompted buyers to drive harder bargains compared to previous years. Approximately 15% of sellers are accepting discounts exceeding 10% of the initial asking price. The impact of mortgage rates surpassing 5% has further reduced the buying power of those relying on mortgages for their purchases.
It’s worth noting that this reduction in buying power does not immediately translate to lower house prices. Buyers still have the option to counterbalance the impact of higher mortgage rates by increasing their deposit or opting for longer mortgage terms. However, these alternatives may not be feasible for everyone, and as mortgage rates climb above 5%, more buyers find themselves squeezed out of the market.
Zoopla’s data already indicates a decline in buyer activity, with 14% fewer buyers compared to the same period last year. Nevertheless, those who remain in the market are committed to moving homes, as reflected by sales agreements running 8% above the five-year average.
Over the past year, house price growth has slowed considerably, with an annual rate of just 1.2%. The Spring saw a recovery in new sales as mortgage rates dipped towards 4%, temporarily halting the decline in house prices over the past three months (following four months of quarterly price decreases). However, Zoopla anticipates a return to modest quarterly price drops in the second half of 2023 due to higher mortgage rates affecting buying power and ongoing increases in the overall cost of living.
The deceleration in annual growth is a common trend across most regions and countries of the UK, with Wales experiencing the highest house price growth at 2.5% and Northern Ireland witnessing the lowest at -0.8%. Some markets, particularly Powys in Wales (4.1%), Calderdale in Yorkshire (4%), and Dumfries & Galloway in Scotland (4%), are still recording annual price increases exceeding 4%. On the other hand, higher-value housing markets are exhibiting weaker growth rates.
Apart from a weakening economy, a sudden surge in the supply of homes for sale poses the main risk to house price growth. There are early indications that supply is growing at an above-average rate, with 18% more homes listed for sale in the past four weeks compared to the five-year average. Fortunately, forced sales are expected to remain limited due to the government’s support measures for existing mortgage holders. Increased supply would offer more choices to buyers and provide greater room for negotiation, while also driving larger house price declines.
Regionally, market activity continues to fare better in Scotland, the North East, and London. Market conditions are weaker in southern England and the Midlands, where house prices experienced significant growth during the pandemic. This disparity means that homes in these regions are currently less affordable, and asking prices are more sensitive to higher borrowing costs.
Looking ahead, Zoopla predicts house price falls of up to 5% this year, depending on mortgage rates and inflation. In the long term, house price growth is expected to be substantially weaker as house prices and household incomes realign steadily over the next 3-5 years.
Richard Donnell, executive director at Zoopla, emphasized that the housing market and homebuyers’ resilience will face another test as mortgage rates exceed 5%. While the decline in prices is anticipated to resume in the second half of 2023, as the supply of homes increases, Donnell advises homeowners to be realistic in pricing and consult with agents to determine the appropriate asking price for a successful sale. Despite ongoing demand for homes, a pragmatic approach is crucial for those planning to move in 2023.