Residential lender Hilltop Credit Partners has released its latest residential market update, shedding light on the recent pull-back in rate expectations and its potential implications for the slowing economy and housing market.
According to Hilltop Credit Partners, markets are now pricing in peak interest rates of around 5.75%. The report suggests that over the next quarter, these expectations are likely to decline further. This change might provide a degree of relief for both the broader economy and the housing market, which has been under significant pressure.
One notable trend is the slowing of overall residential build cost inflation. After a sharp increase of 15.5% year-over-year a year ago, this figure has markedly dropped to 1.5% year-over-year in June 2023. This reduction could be a sign of stabilization in construction costs.
Meanwhile, first-time buyers are facing a growing financial burden. Mortgage payments as a percentage of take-home income for this group have risen from around 28% before the pandemic to approximately 40% in Q2 2023. This increase highlights the challenges faced by new entrants to the housing market.
Several other factors provide hope for a more benign inflation backdrop in the second half of 2023. Sharp declines in raw material prices, a slackening labour market, and the lagged effect of 14 rate hikes could lower the chances that the Bank of England (BOE) will over-tighten in the short term. It may even provide cover for a pause in rate hikes in the coming months.
The report also points to worrying signs in new housing construction. New housing starts have fallen to their lowest level in over two years. Moreover, guidance and analyst forecasts for large publicly traded UK house builders suggest that new completions could fall by 30% by the end of 2024. This trend would imply an industry-wide delivery of fewer than 200,000 units for the first time in nearly a decade.
Finally, UK rents have surged, rising at an exceptionally strong rate of 3.8% in the three months to June. They are currently 10.4% higher than year-ago levels and an astonishing 29.0% above pre-pandemic levels. This increase reflects the ongoing strain in the rental market, impacting tenants across the country.
