The housing market has hit a brick wall, and it is not rising house prices that are to blame. Mortgage rates have climbed to their highest level in over a decade, crushing the hopes of first-time buyers and choking off demand. The average two-year fixed rate now stands at 6.7%, according to Moneyfacts, a level that would have been unthinkable just two years ago when rates hovered around 2%. This is a brutal correction for a generation that had grown accustomed to cheap credit.
For a typical homebuyer borrowing £200,000 over 25 years, the monthly repayment has surged from £900 to £1,300. That extra £400 is not loose change; it is a rent payment, a grocery bill, a chunk of disposable income that disappears into the coffers of lenders. Unsurprisingly, mortgage approvals have plunged to their lowest since the financial crisis, excluding the pandemic lockdowns. The Bank of England’s data shows a mere 50,000 approvals in June, down from 80,000 a year ago.
This is a market that has stalled because the arithmetic no longer works. House prices remain stubbornly high, with the average home costing £288,000, some nine times median earnings. With interest rates elevated, the cost of servicing a mortgage has swallowed the affordability cushion that low rates once provided. First-time buyers, the lifeblood of the market, are being priced out. They now need a deposit of £60,000 on average, a sum that takes years to save even for dual-income households.
The government’s response has been typical: tinkering at the edges. The Help to Buy scheme has been extended, but it merely subsidises demand without addressing the supply side. More houses need to be built, but planning restrictions and nimbyism ensure that supply remains constrained. The result is a market that is frozen, with transactions falling and prices beginning to slip. Nationwide reports that house prices fell 0.2% in June, the first annual decline in a decade.
The root cause, however, is not the housing market itself but the broader fiscal mess. The Bank of England has raised rates to 5% to combat inflation, which remains stubbornly above 8%. The bond market has punished British excess, with gilt yields rising sharply, pushing up mortgage rates in turn. This is the price of profligacy. The government borrowed £200 billion last year to pay for furlough and energy subsidies, and the markets are now demanding a premium for holding British debt.
Investors are fleeing the pound, which has fallen 15% against the dollar in the past year, making imported goods more expensive and stoking inflation. Capital flight is a vote of no confidence in the government’s ability to manage the economy. The only way to restore confidence is to cut spending or raise taxes, but neither is politically palatable. So the Bank is left to do the heavy lifting, and its blunt instrument clobbers the housing market.
For now, homebuyers must grin and bear it. The mortgage market is repricing, and variable-rate borrowers face even steeper hikes. Fixed-rate deals are expiring, and many will face payment shock when they refinance. The Council of Mortgage Lenders warns that arrears are rising, albeit from a low base. The true test will come when unemployment starts to rise, as it inevitably will when the economy slides into recession.
What is the bottom line? The housing market is caught between the rock of high prices and the hard place of high rates. It will not be bailed out by government or central bank. The correction, when it comes, will be painful. But it is necessary. The pandemic-era boom was built on cheap money and false expectations. Now the hangover has arrived, and British homebuyers are paying the price for the nation’s fiscal sins.
