As we enter a winter of discontent in terms of cost of living, inflationary pressures and energy prices increases, what does this mean for house prices? It is no secret that household budgets are under pressure at the moment. Inflation is rising, energy prices have increased, and wage growth is sluggish. This is all putting pressure on people’s ability to afford their homes.

Mortgages equate to the most significant debt for many households. When households have large amounts of debt, consumption growth becomes harder to predict during an economic downturn. People might suddenly hold back on spending at the first sign of uncertainty because they worry about repaying their debts. This has a knock-on effect on the rest of the economy, and a small problem can suddenly become a big problem.

House prices

There are a number of factors that affect property prices. For one thing, prices tend to rise if people expect to be richer in the future. Usually, that happens when the economy is doing well as more people are in work and wages are higher.

House prices also tend to rise if more people are able to borrow money to buy properties. The more lending banks and building societies are willing to provide, the more people can buy, and property prices will rise.

Consumer spending

The housing market is also closely linked to consumer spending. When prices go up, homeowners become better off and feel more confident. Some people will borrow more against the value of their home, either to spend on goods and services, renovate their house, supplement their pension, or pay off other debt.

When house prices go down, homeowners risk their house will be worth less than their outstanding mortgage. Therefore, people are more likely to cut down on spending and avoid making personal investments.

So, what does this mean for house prices?

The average house price increased to £294,260 in August 2022 as the cost of living crisis and interest rates continued to impact on people [1]. While property prices have so far proved to be resilient in the face of growing economic uncertainty, many industry surveys point towards cooling expectations across the majority of UK regions as buyer demand eases, and other forward-looking indicators also imply a likely slowdown in market activity.

Rising energy prices are going to put more pressure on household finances. At the levels being predicted, this is likely to constrain the amounts that prospective homebuyers can afford to borrow, on top of the adverse impact of higher energy prices on the broader economy.

Policy intervention

While government policy intervention may counter some of these impacts, borrowing costs are also likely to continue to rise, as the Bank of England is widely expected to continue raising interest rates into next year.

With the cost of housing and loan to income ratios already higher than have been seen previously, this will undoubtedly add pressure to house prices. However, according to The Halifax House Price Index for August, this should be understood in the context of the exceptional growth witnessed in recent years, with average house prices having increased by more than £30,000 over the last 12 months alone [1].

Inflation continues

In the short-term, we will likely see a slowdown in the housing market. Demand for properties could soften as people tighten their belts and put off big purchases, which could lead to a fall in prices in some areas.

In the longer term, however, things are less clear. If inflation continues to rise, it will eat into people’s disposable incomes and make it even harder to afford a home. This would put downward pressure on prices.

Individual circumstances

There is no one-size-fits-all answer to how to deal with a cost-of-living crisis, as the best course of action will vary depending on individual circumstances.

However, there are some general steps that homeowners and prospective homeowners can take in order to ease the financial burden:

1. Review your budget and expenses. Take a close look at where your money goes each month and see where you can cut back on unnecessary spending. This will free up more money to put towards your mortgage or rent payments.

2. Research government assistance programs. If you are struggling to make ends meet, there may be government assistance programs available to help you cover your housing costs.

3. Consider refinancing your mortgage. If you are struggling to keep up with your current mortgage payments, you may be able to refinance to a lower interest rate and monthly payment, which could make it easier to afford your housing costs. Whilst the low mortgage offers we have seen in recent years may not be as prevalent as they have been, it’s worth doing some research to see if this could be an option for you.

4. Get creative with your living situation. If you are really struggling to afford your housing costs, you may need to get creative with your living situation. This could involve downsizing to a smaller home or apartment, moving to a less expensive area, or even sharing a residence with others. If you have a spare room, you could consider the Government’s Rent-A-Room scheme, which allows owner occupiers and tenants to receive tax-free rental income if you provide furnished accommodation in your only or main home. There are criteria that need to be met in order to benefit from the scheme, and you can find out more information on the Government website.

5. Seek advice. If you are struggling to manage your finances and are unsure of what steps to take, you could seek advice. There are a number of organisations such as Citizen’s Advice who can provide information and advice free of charge. Additionally, the Government website, Money Helper (www.moneyhelper.org.uk) provides free guidance on various matters from benefits to pensions and retirement.

Source data:

[1] August 2022 | House Price Index | Halifax House Price Index

Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

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