What is happening to house prices in Wales?
Introduction
The housing market in Wales has seen some fluctuations in recent months. Prices have been trending downwards after hitting record highs late last year. In this post, we will analyse the current state of the Welsh housing market, examining the factors causing the changes and what we might expect going forward.
Recent Price Changes
Over the past three months, average house prices in Wales, and across the United Kingdom have declined. According to data from Halifax, prices have fallen by 0.3% in July and are now on average 2.4% lower than a year ago. But Wales, a region that saw some of the fastest growing house prices during the pandemic, has now seen a sharper decline in value, with a 3.3% reduction year on year (source). So while prices remain high historically, the market has cooled slightly from its peak.
Factors behind the change
What's causing this reversal in the housing market? There are likely a few key factors at play:
Rising mortgage rates
Interest rates on mortgages have increased following a series of Bank of England base rate hikes. The Bank of England has raised its base rate five times since December 2021, taking it from a historic low of 0.1% up to 5.25% as of writing. This has fed through to mortgage rates, which have also increased significantly. The average 2-year fixed mortgage rate is now over 6.84%. This sharp rise in mortgage rates makes monthly repayments much more expensive. Based on a £200,000 mortgage over 25 years, the increase from just 2% to 4% would add around £200 per month to a buyer's repayment. This reduces buyers' purchasing power and affordability. With more disposable income being spent on mortgage payments, buyers have less budget leftover for home purchases. This cooling effect on demand can lead to slower house price growth.
Cost of living crisis
The UK is experiencing a major cost of living crisis driven by high inflation. Consumer prices rose 9.4% in the 12 months to June 2022, the highest rate in 40 years. Energy bills, fuel, and food costs have all skyrocketed. This is squeezing household budgets and leaving buyers with less disposable income. First-time buyers in particular are impacted, as saving for a deposit becomes more difficult amid high rents and other costs. With buyers needing to devote more of their income to basic living expenses, they have reduced capacity for mortgage repayments and purchasing properties. This limits demand in the housing market and contributes to slower price growth.
Economic Uncertainty
There are growing concerns about the UK economy entering a recession. GDP declined in Q2 2022, inflation remains sky-high, and consumer confidence is low. This uncertain economic outlook makes buyers more cautious about making major long-term purchases like houses. Buying a home is already a major financial commitment, so the added risk of a potential recession makes buyers hesitant. People worry about job security and stable income when the economy looks shaky. This prudence leads many potential buyers to delay or reduce house purchases until the economic picture improves. Weaker demand applies downward pressure on house prices.
These factors have cooled demand in the market, taking some heat out of price growth. However, the supply-demand imbalance remains significant, which will continue to put upward pressure on prices.
Outlook going forward
While prices have dipped recently, analysts do not expect a major crash. Halifax predicts the declines will be relatively small, with no "precipitous decline" ahead.
Some reasons the outlook remains fairly positive:
- Interest rates are expected to peak soon, limiting further mortgage rate rises.
- Employment remains strong, supporting buyers' finances.
- An ongoing housing shortage maintains high demand.
Overall, expect the Welsh housing market to see a period of stabilization rather than steep falls. Prices remain well above pre-pandemic levels, signalling the strength of the market long-term. But buyers will welcome a break from rapid price inflation, and improved affordability.
Conclusion
The Welsh housing market has cooled slightly from its peak, with prices declining moderately over the past three months. Factors like rising rates, inflation, and economic uncertainty have dampened demand. However, analysts don't foresee a major crash, given the market's fundamentals remain strong. While buyers, especially first-time buyers will welcome a reduction in prices, the high interest rate environment will add another barrier to home ownership, whilst existing homeowners are unlikely to see major losses in equity.
