Following last week’s announcement by the prime minister of his five–point-plan to aid Britain during the cost-of-living crisis, a key aim featured in the speech included cutting Inflation by half in 2023 to give people financial security and ease the cost of living. According to the Office of National Statistics – the Consumer Prices Index recorded a rise of Inflation by 9.3% in the 12 months to November 2022. Predictably the increase in Inflation has rocked the UK housing market, as we have seen in Q4 of 2022, with a retreat in first-time buyers. The UK’s housing market’s period of record highs has also begun to cool off – according to the Office of Budget Responsibility; they predict that house prices will fall by around 9% between the end of 2022 and September 2024.
The news of the government’s ambition to cut inflation would be a welcomed change for Britain’s housing market as it has already had a damming effect on renters, landlords and first-time buyers. The OBR’s forecast on mortgage interest rates predicts highs of 5.0% in the second half of 2024 with a slight fall in average rates to 4.6% in 2028. As Inflation rose in the UK in 2022 and early 2023, mortgage rates have dramatically increased, which has led to many first-time buyers being deterred from the market. According to the Yorkshire Building Society, the number of new buyers fell 9% year-on-year, dropping to 370,287 in 2022 from a 20-year high of more than 400,000 a year earlier. The increase has meant that many planning on getting on the housing ladder who require a mortgage can now not afford to due to the rise in interest rates.
If the government successfully cuts the inflation rate, it could have an overwhelmingly positive effect on the UK housing market. The trend of a max exodus of landlords in Q4 of 2022 could be reversed as the costs associated with running a buy-to-let property are reduced. This could mean an increase in the number of rental properties available, squashing the strained demand for rental properties we saw in Q4 of 2022, which rose by 3.8% from 2021 according to the ONS and potentially make rents cheaper as landlord’s mortgages decrease.
David Hannah, Group Chairman of Cornerstone Tax, comments on how the prime minister’s promise of halving the rate of inflation will impact the UK property market:
“The current economic climate has made it more challenging than ever to save for a house deposit which means that renters – especially those under 30 – are in danger of being stuck in the rental cycle for a while. This has been exacerbated due to the fact that landlords have had to increase rents as a result of their mortgage repayments shooting up.The knock on effect of this is also that some landlords have even decided to exit the market, putting further strain on supply and demand issues that were already present.
“For first-time buyers – we saw record rises in house prices last year which made the market increasingly difficult to enter. Now, even though the average cost of a property is falling, the increase in mortgage rates and the decrease in the availability of mortgages are significant problems. Cutting inflation and therefore reducing interest rates would clearly be a welcomed change for everyone in the UK’s housing market, whether they’re renting or already on the property ladder.”
