How will the cost of living crisis impact on the property market?

It’s likely that we will be hearing about the impact of the cost of living crisis on everyone for the rest of the year, so the big question being asked by many is, will it cause a fall in house prices, especially after the big rises we’ve seen.

Thanks to Carol Lewis at the Times who kindly featured some of my commentary from my thoughts on whether there would be a crash or not, we now have a pretty good range of opinions of what will happen over the next few years.

Some are sticking with their forecasts from the end of last year. While new forecasts have come out as inflation is now expected to reach as high as 10% by the end of 2022, (Source: BBC), there are some now predicting price falls – albeit off bigger rises expected this year.

For example, the CEBR suggests property prices could fall by just under 3% in 2023 but will then rise again in 2024. Capital Economics has driven many of the ‘doom and gloom’ headlines we are seeing in the press, suggesting that ‘average mortgage rates’ could rise from 1.6% to 3.6% over the next year and that although this would normally cause a drop in prices they “are not that downbeat".

They are forecasting an 8% rise in 2022, a -3% fall in 2023 and a -1.8% drop in 2024.

Overall though, having talked to quite a few forecasters, Carol’s conclusion was a wise one: ‘don’t bank on more than a dip’ and at worst, I think that’s about right.

What I think forecasters are forgetting is the huge change in the impact of rates and mortgages on the property market. For homeowners, they might end up paying more for their mortgage, but many are on fixed rates and have seen a boost to their property’s value over the last few years which could allow them re-mortgage at lower LTVs, and therefore actually get better rates.

And buyers from 2014 have been on repayment mortgages with low LTVs – so very different to the 100% and 125% borrowing they had prior to past recessions. Add to this that 50%+ haven’t actually got a mortgage, and it’s not homeowners who are really going to see problems from the cost of living crisis, it’s tenants who I think are going to have the toughest of times.

Tenants are seeing:-

1. LHA frozen yet again and all tenants are seeing a big increase in rents, especially if they are looking to move property after living in the same one at the same rent for a while.
2. They have less control over their utility bills – but can get a smart meter to help track them if they are the bill payer.
3. Unemployment is 2x the rate of homeowners.

So far this year we’ve seen both housing prices and transactions fly both in the sales and rental market this year. However, the cost of living crisis is likely to reduce transactions in the sales market, may be even below the 1.2mn predicted, while in the rental market, rents have risen, but this is likely to fall back as typically rents move in line with wages, which, to be fair, have increased over the last 12 months, to the point that Paragon have just reported that in real terms, although it differs by area, affordability for the rental market has actually improved by 1%.

My conclusion? Well as I mentioned in the Times article, prices are not moving uniformly anymore – as a result, they will do this year what they have done for some time, rise for some, fall for others and stay as flat as a pancake for the rest!

And, although rents are currently flying, as the cost of living bites, rental growth is likely to stabilise as they typically track wages, not wealth. 

Want to know more about forecasts? See our 2022 and beyond forecast article. 

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