Buyers Hitting Lending Gap As Property Market Cools

As the UK property market cools, research shows that buyers are having to fund an £8,000 lending gap between what lenders are willing to give and what buyers expect – either that, or buyers are having to drop their prices.

With rampant inflation, families falling into energy poverty and a cost of living crisis, the post-lockdown growth blip in the property market seems to have come to an end. The average UK house price is currently £286,397, but according to research by property purchasing specialist HBB Solutions, property sales being subject to a down valuation are being hit to the tune of a 2.8% reduction.

This means that there is a £7,978 lending gap between the sum a lender is willing to lend and the price expectations of the seller.

Either the seller or the buyer has to move their position to fill the shortfall. With the average buyer placing a 25% deposit to the tune of £71,599, a £7,978 increase pushes the required deposit pot up to 27% of the property’s value.

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According to HBB the biggest down valuation adjustments in the current market are in the East Midlands, where a 3.3% reduction is causing a price gap of £8,109 between buyer and seller.

In the East of England, this gap stands at £8,090, with the average down valuation coming in at 2.3%.

Scotland is seeing the second largest down valuation adjustment at 4.3%, meaning buyers and sellers need to re-negotiate to the tune of £8,089, with buyers and sellers in Wales (£8,056) and the South West (£8,011) also having to readjust a lending gap by more than £8,000 as a result of a down valuation.

Lending Gap

HBB says that while down valuations are a worst case scenario for buyers and sellers who have already agreed a sale price on a property, they will become more common as the market enters a period of heightened instability. HBB says that sellers remain intent on securing the highest price for their properties, and buyers are often willing to pay to secure a property before mortgage rates rise any higher.

Dr Nikodem Szumilo, Professor in Economics of the Built Environment at UCL, says that the decisive factor in an “abrupt correction” in house prices would be the refinancing of mortgage payments, which are expected to become increasingly unaffordable. As such, prospective buyers looking to get more value for their money through a crash in prices “may not want to hold their breath”. Dr Szumilo believes it slightly more likely that there will be a sudden drop in the housing market as opposed to a slow decline.

He believes that this will lead to “empty homes for a very long time”, as “there is a lot of cash in the market at the moment”, so developers who have enjoyed high prices will not want to see a loss on their investment.

Speaking in the Daily Express online, Dr Szumilo said “I’ve had developers tells me: ‘it’s a great investment because you can never lose money on real estate’. I didn’t argue because it was pointless. It’s an incredibly stupid point to make.

“You will be out of business as soon as the market turns. This is exactly what is happening at the moment; we have the market turning and people used to thinking that you can never lose money on real estate are now losing money on real estate.”

House prices which had been at an all-time high could be heading for a sharp downturn with soaring mortgage rates and cost of living. Some analysts predict a fall of seven percent in the next two years, with London and the South East hit even harder, leading to an even greater lending gap.

A drop in prices might make getting on the housing ladder easier for prospective buyers, but at will be painful for those who already own a house and may be looking to move. With mortgages on the rise, Dr Szumilo said it was only worth waiting “if you have a lot of equity about that you can invest in a house”.

Worldwide, there is speculation that a violent contraction of the property market in China may have broad economic implications. The Chinese government wants to intervene to curb speculation, and rein in what it calls the “three high” problem: high prices, high debt and high financialisation. The approach has had dramatic results, with financing for property developers falling away and property sales declinig by as much as 20-30%. Developments in progress remain uncompleted, and people have taken to the streets, banding together to stop mortgage payments on such projects in protest.

The risk is that the Chinese property market crisis may drag the broader economy down with it, hitting suppliers, small- and medium-sized companies in construction, household consumption, and most dangerously the banking system, which has at least a quarter of its assets in property.

With the cost of living crisis, rampant fuel charges and a rise in mortgage and interest rates, a lending gap may be just one of the symptoms of a rapidly cooling property market.

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