The elaborate game of musical chairs that is UK politics continues apace. And, this time, the music stopped with Rishi Sunak. By this point, you’ve probably got a fairly good idea of what Rishi Sunak (or at least his PR) is all about – fiscal responsibility, economic stability, and housing reform. 

But, with house prices expected to slump 12.5% in London and 10% across the UK in 2023, the question on everyone’s lips is what will Prime Minister Sunak do? Can he save the housing market?

Let’s take a look at the positives first.

Yes

First of all, there’s some evidence that Sunak has begun to undo the damage wrought by the previous administration’s disastrous mini-budget. The PM’s appointment has seen Sterling climb to its highest point since the mini-budget and UK gilt yields are beginning to recover. What’s more, the five-year swap rate, which is used to price most UK mortgages, is sitting at 4.5% and is likely to drop further. 

Of course, the UK housing market and economy are intrinsically linked. So, the markets stabilising with the return of ‘sensible’ politics is good for anyone buying a house or remortgaging. 

With the return of some stability, the longer-term outlook is a little sunnier. The cost of borrowing for government and business has been falling since Sunak took office – the markets reacting positively to tough talk on ‘balancing the books’. This does bring some hope that interest rate rises are over, for now – a huge relief for homebuyers. 

However, it’s worth noting that rates are still far higher than they were 12 months ago. Much of this is out of the government’s hands. As we slide into a cost of living crisis and mini-recession, we just don’t know how far the Bank of England (BoE) will have to go to try and dampen inflation. But, for the moment, it does look like mortgage rates will return to 4-5% in 2023.

For conveyancers, this is broadly good news. More certainty around borrowing costs will stabilise transaction volumes, even if it doesn’t necessarily mean prices will remain at current levels. 

What of the shortage of affordable homes that’s hamstrung the bottom end of the market? The picture here is less clear. While there’s been some encouraging rhetoric from Sunak on the need to build more houses and relieve demand, the jury is still out on how far the government will fulfil its pledges on new homes.

No 

Now for the slightly less positive outlook. It’s not news to anyone involved in property that the market has been overheating for some time. The average house price in the UK is between 8 and 11 times the average salary (depending on where you live). It’s a situation that has priced a generation of potential homebuyers out of the market and it’s been clear for a while that something has to give.

That ‘something’ could be about to. Remember earlier when we mentioned that gilt markets have calmed? The trouble is they haven’t calmed that much. Yields on ten-year gilts are still double what they were in May 2022. 

The problem with this is that gilt yields (or how much the government has to pay investors for what it borrows) are a key barometer for mortgage providers when setting interest rates. Or to put it another way, high gilt yields mean high-interest rates.

Unless something is done to solve this quickly, the market could be about to undergo a correction.

Even if interest rates do decline back to 4-5%, in a country that’s grown used to 2% mortgages, that’s a huge jump. As many first-time buyers come to the end of 2 or 5-year fixed-term mortgages on lower rates, they may find that higher rates coupled with a cost of living crisis mean they suddenly can’t afford to pay. 

To illustrate what we mean, Goldman Sachs has estimated that 40% of the UK’s mortgages will be repriced in the next 12 months. A homeowner who bought a £290,000 house on a 2-year fixed rate of 1.56% (both average prices) will pay an extra £5,900 per year if they’re forced to switch to a new fixed rate of 6%.

Those homeowners, predominantly first-time buyers who are already spending a huge chunk of their income, simply won’t be able to pay. So, they’ll sell, and in turn, the supply of new buyers will dry up, leading to a decline in prices. 

This isn’t to say all is lost and a little deflation in the housing bubble will be a good thing in the long term. And, there are things Sunak could do to ease the situation, namely mortgage interest relief and energy rebates targeted at those homeowners who need them most.

However, what Sunak cannot change is that the era of cheap credit is over and, with it, the age of rampant house price growth. Perhaps it’s now time to look at what comes next.