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Will the increased cost of living impact on an already overheated housing market?

Written by: Kirsty Wilson
21 April 2022

Property BoomThe recent inflation figures released by the Office of National Statistics, showed a rate of increase of 7% in March 2022 when compared to March 2021. This rate is the highest inflation rate for 30 years and it impacts on everyone’s lives as well as businesses. It is almost the perfect storm of rising food prices, rising fuel prices and rising costs for business and it has not been helped by the vicious war being waged by Russia against Ukraine.

The cost of living in Scotland has been increasing month on month. This will not be helped by increased National Insurance contributions introduced in April and which will hit pay packets at the end of the month.

The press and media are covering many stories of people struggling to keep up with rising costs and having to choose between food and heating – never a good situation and very worrying considering the UK is the fifth wealthiest nation in the world!

Whilst wages are also rising as we begin to emerge fully from the coronavirus pandemic, they are not rising sufficiently to offset the cost of living being driven by price increases across the board.

Inevitably, the property market is unlikely to see out 2022 unscathed!

Has the property market been affected?

Set against this background, we have an overheating property market where sellers have been receiving bumper offers over the asking price for nearly two years. This has been mostly driven by the lack of good quality property on the market and a pent up demand from home movers. There are simply not enough properties on the market for the number of buyers looking to move house. That, coupled with the lack of new build supply has led to a premium market for sellers. The problem, however, with that is that the sellers also have to find a property to buy and, having received a premium for their own house, usually have extra cash available to put into their bid for their new house at the closing date.

This is a spiral that is unsustainable. Something will have to give – but when, is the crucial question.

The Bank of England has been slowly increasing interest rates. This has a knock-on effect on mortgage rates but by any measurement, mortgages rates continue to be at historically low levels.

What challenges does the property market face going forward?

There continues to be pent up demand by property buyers looking to move home. A recent RICS survey confirmed this and laments the paucity of sale properties on the market. As long as this situation exists, sellers will continue to attract premiums when they place their property on the market. However, if sellers are unable to buy a suitable new house because of the scarcity of suitable property, we may see more conditions introduced into the Missives making the sale conditional on the seller finding a suitable property to buy.

To break this cycle, we will need to see a substantial number of houses to come onto the market or the current demand to die back. If the market can get back to equilibrium during 2022, we might then see a more modest rise in prices but with sellers being unable to command the premium currently being demanded.

What kind of factors could cause the market to fall back?

The cost of living rise is having an impact on everyone and it will, inevitably, have an impact on the property market. Many buyers need a mortgage to buy a house and one of the key criteria considered by lenders is mortgage affordability.

When considering mortgage affordability, lenders will take into account the level of income compared to the level of spend regularly incurred by the individual. With costs rising faster than income, when you do the sums, that means there is less left at the end of the month than there was, say, this time last year. Lenders will score borrowers against their affordability criteria and will “price in” the inevitable interest rates rises the Bank of England are likely to impose to dampen inflationary pressures. This means that mortgages which might have been offered, say, six months ago will no longer be offered because the borrower cannot pass the Lender’s affordability tests.

If that happens, by default, the number of buyers will reduce which then feeds into a reduction in demand. This is likely to temper a market that has been overheating since the first lockdown came to an end in June 2020.

Be prepared for a “normalisation” of the property market

As demand quells, even with the relative paucity of supply at the moment, the level of competition for those properties that are on the market will begin to drop off. You may find that no longer will a dozen offers be received for a property on a closing date. There is still likely to be competition, but, perhaps, not quite as fierce.

The property market also is not binary. It is not full of people moving to higher value properties. People move for all sorts of reasons. Some move up because they need an extra room because they have a new arrival. Others move because they have secured a job which is too far for them to travel to from their current home. Some people may simply want to move to a similar house in a different area whilst there are others who will move to get into a catchment area for a certain school. Older people downsize and first-time buyers try to get a foot on the property ladder.

The property market is very dynamic and there will be challenges for both buyers and sellers for the remainder of this year.

So, if you are thinking of selling, now might just be the right time to sell for a premium. As they say, “all good things come to an end”…eventually!

Every year, we help many, many clients with their estate agency and conveyancing needs. If you need help getting your property on the market or with the buying or selling process, please contact us.

Written by:

Kirsty Wilson

Kirsty is a solicitor of ten years post qualified experience and works predominantly in our conveyancing team in the North Berwick office.  Kirsty also deals with court work, assisting with actions in the Property Chamber of the First-tier Tribunal.   Kirsty graduated from the University of Aberdeen in 2008 and completed her traineeship in a rural firm before qualifying as a solicitor in 2010.  Over the years Kirsty has gained a variety of experience in working in property, private client and court work both in smaller high street firms and larger city firms. Outside of work Kirsty enjoys water sports, particularly windsurfing in the East Lothian area and sailing dinghies at East Lothian Yacht Club.

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