Halifax House Price Index: House prices plunge 0.4% in October as borrowing costs rise

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, commented:

“The 0.4% monthly drop in house prices in October is to be expected when you consider the challenging borrowing conditions and general gloom clouding the economy right now.

“With inflation at a 40-year high of 10.1%, interest rates at 3%, the economy slowing and the mortgage market still reeling from the effects of Liz Truss’s short tenure as Prime Minister, affordability is very much in the spotlight with buyers forced to confront whether now really is the right time to buy.

“House prices may have stayed buoyant in the first half of the year but October’s monthly decline, the third drop in the past four months, and slowing annual growth confirm what we already know - the pandemic-boosted house price boom is now over.

“The effect of higher borrowing and living costs was evident in the BoE’s latest mortgage data, which showed a 10% drop in approval levels in September. While higher mortgage costs were already causing affordability challenges for first-time buyers in the first three weeks of September, the situation escalated when Chancellor Kwasi Kwarteng’s ‘mini-budget’, spooked the bond market causing mortgage rates for an average two-year fix to jump from 4.74% on the morning of his statement to a peak of 6.65% just a few weeks later.

“With expectations prices could fall by as much as 30% in the next-year in a worse-case scenario, this offers some hope to first-time buyers. However, mortgage rates are still stubbornly high at around 6.5% despite the BoE’s lower interest rate expectations of a peak between 3 to 4% next year. Some analysts are more bullish expecting an interest-rate peak closer to a 5% mark, something that will keep mortgage rates higher for longer and prolong the misery for homeowners.

“While existing homeowners coming to the end of fixed-rate deals are facing monthly repayments hundreds of pounds higher, those looking to buy who are patient and put plans on pause may see better deals coming down the line,

“For buy-to-let landlords, however, the outlook is less rosy. After years of bumper house price inflation, ultra-low borrowing costs and intense demand from tenants driving up rents, Britain’s amateur landlords have a catalogue of problems to deal with.

“Not only have their borrowing costs gone up, but tax changes brought in during the era when George Osbourne was Chancellor means they can no longer deduct mortgage expenses from their rental income when calculating taxable profit. Add in the fact the economy is now in recession territory, making it harder for landlords to demand higher rents to cover higher mortgage costs from tenants who might be financial stress themselves, and some owners may be forced to sell at a time when the value of their property is falling.

“The rush to sell may be exacerbated by tighter eviction regulations, costly energy efficiency rules and news that the Government may increase the headline rate of Capital Gains Tax – the highest rate currently applied to residential property is 28% - which is levied on profits from selling a property that is not an individual’s main home.

“If landlords look to sell up now to avoid the double blow of CGT and a falling market, it could drastically reduce the stock of private rental properties in a year or two.

“With tax rises and spending cuts on the cards in the Autumn Statement, and consumer sentiment on the floor, the property sector will be under pressure for some time to come. Those looking to buy might want to watch and wait for now in the hope that better deals lie ahead in terms of mortgage deals and property costs. Overstretching yourself and taking on a high loan-to-value mortgage now could be a very risky move. The last thing anyone wants to deal with is negative equity, where the house is worth less than their home loan, particularly during a recession when job security is in peril.”