1. Interest Rate Hikes: Between December 2021 and August 2023, the Bank of England raised the bank rate from 0.1% to 5.25%, a significant increase. This move was expected to dampen the housing market by making mortgages more expensive.
2. Impact on House Prices: Initial predictions suggested a potential 25% plunge in house prices, but this seemed exaggerated considering the current economic conditions. Instead, house prices experienced a more moderate decline of around 5% from their mid-2022 peak.
3. Soft Housing Market: Despite the stabilization, the housing market remains soft. Transactions and starts are below normal levels, and mortgage costs are still high, deterring potential buyers.
4. Affordability Concerns: Affordability has become a significant issue, with mortgage costs consuming a significant portion of a first-time buyer’s take-home pay. Even with the recent decrease in costs, mortgage payments still account for nearly 40% of take-home pay for new buyers.
5. Positive Signs: Despite the challenges, there are some positive signs. The Royal Institution of Chartered Surveyors (RICS) survey indicates a rise in new buyer enquiries in January, the first increase since April 2022. Additionally, average house prices have risen by approximately 1% from their Q3 low.
6. Economic Resilience: The resilience of the labor market has played a crucial role in supporting house prices. Unlike in the 2000s, when falling house prices led to rising unemployment and decreased consumer spending, the current situation is different. Homeowners have been paying down their mortgages, and employment remains high.
7. Future Outlook: Looking ahead, the timing and pace of recovery in the housing market will depend on several factors. These include further cuts in mortgage costs by banks in response to BoE rate cuts, the impact of rising real incomes and economic recovery on buyer sentiment, and potential government policies to improve housing affordability.
8. Long-Term Trends: Over the next decade, sustained house price growth is expected due to a chronic imbalance between demand and supply. Population growth estimates indicate a need for significant housing construction to meet demand, but supply growth remains inconsistent due to regulatory constraints.
9. Risks of Overheating: Without serious efforts to boost housing construction, there is a risk of the housing market overheating, especially if interest rates are lowered too much or immigration exceeds expectations.

In summary, while the housing market has shown resilience in the face of challenges, uncertainties remain, and policymakers need to address structural issues to ensure sustainable growth and affordability in the long term.