House price boom wanes as buyers pull out

Property sales are beginning to slow in response to mortgage companies' rapid increase in interest rates.

Purchasers are pulling out of transactions and sellers are accepting price cuts as experts warn that the number of sales falling through will rise in response to rocketing rates.

Lenders this week withdrew mortgage deals at the fastest rate on record as interest rate expectations exploded in response to the Chancellor’s mini-Budget. Lenders quickly returned to the market but the deals that are still available are rapidly becoming more expensive, with analysts expecting that average rates will soon exceed 6pc. Less than a year ago buyers could take out mortgages at below 1pc.

Jenny Batchelor, 28, accepted an offer on her one-­bedroom flat in Surrey in August. On Tuesday the deal disintegrated. Her buyer pulled out because of the mortgage market turmoil.

“They were an elderly couple, they were retired, and they wanted a buy-to-let to supplement their income. But then they said they were no longer proceeding. Their solicitor said it was because of the mortgage market chaos. All of my equity is stuck in that flat. My entire life is on hold,” Ms Batchelor said.

Soaring interest rate expectations mean at least 134,000 buyers have been shut out of the property market immediately, according to estimates from analysts at Capital Economics.

This is because lenders have to factor future rates into their affordability testing. The current forecasts imply that banks have already had to cut their maximum loan size from five times a borrower’s income at the start of the year to four. This wipes out a third of borrowers taking out two‑year fixes.

Kwasi Kwarteng’s tax cuts triggered a drop in the pound to a record low and prompted fears of even higher inflation, which will push the Bank of England to make larger increases in the Bank Rate.

Nathan Emerson of Propertymark, an estate agents’ body, said a growing number of sales would collapse in the coming months as delays meant buyers’ ­competitive mortgage offers would expire.

“The time taken to buy a house is on average over 17 weeks. Most mortgage offers will stand for three months,” Mr Emerson said.

If an offer expires before completion, buyers will have to pull out or renegotiate the price, because higher rates will dramatically reduce how much they can borrow.

Beth Rudolf of the Conveyancing Association, a trade body, said property lawyers had seen calls jump by a third. “One of our members is getting 300 extra calls a day,” she said. “Sellers are asking if their buyer will lose their mortgage offer.

“If they have an offer, that is binding. But if the offer has not been issued yet, then yes, they have to worry.”

A delay before the turmoil

Lenders are bound to continue with mortgage offers that have already been issued, although in rare circumstances they can withdraw at any time before a sale’s completion. This usually occurs only if there has been a significant change in circumstances or a legal problem has arisen.

There will therefore be a delay before the market turmoil hits transactions en masse. But there are early signs that sales are already starting to collapse across the country.

In the seven days to Thursday, the share of agreed sales falling through before completion was 30pc, according to property website Rightmove. This was up from 29pc in August.

There are now widespread forecasts for big house price falls. Investment bank Credit Suisse said values could “easily” fall by 10pc to 15pc. Andrew Wishart of Capital Economics said: “We are now at a point where the outlook is not dissimilar from 1989 and 2006.” Both of these moments preceded 20pc drops in house prices.

Sellers are slashing their price expectations. Graham Cox of the Self Employed Mortgage Hub, a specialist broker, said: “The dam has finally broken this week in the housing market. One of my clients told me he had just had an offer accepted at £13,000 under the asking price on a £535,000 property in south-west London. That was unheard of six months ago. I firmly believe house prices are already starting to fall.”

Samuel Mather-Holgate of Mather & Murray Financial advisers said mortgage providers were also refusing to lend at the prices that buyers had agreed to pay. “ ‘Down valuations’ are coming thick and fast,” he said. Buyers will be left high and dry as they have little chance of shopping around, he added.

Adrian Anderson of Anderson Harris mortgage brokers said one of his clients had just called to say he was stopping his property search.

“In January I was quoting 1.3pc for a five-year fixed rate. The equivalent rate today is 3.9pc. He has decided he does not want to take on a larger mortgage commitment and pay three times the amount of interest he would have been paying had he bought at the beginning of the year,” he said.

Just as buyers are pulling out, soaring rates mean existing homeowners face a huge remortgage crunch. A record 1.8 million homeowners will come to the end of their fixed-rate deal next year, just as the Bank Rate is expected to peak.

A homeowner who needs to refinance a £240,000 mortgage that they took out on a two-year fix in 2021 could see their monthly payment rise from £620 to £1,120 next year, a jump of 81pc, according to Capital Economics. There is a looming risk of forced sales, just as demand is at its lowest.