Morecambe & Wise. French & Saunders. A bit of Fry & Laurie. Arguably even Ant & Dec. British entertainment has a long and deep association with the comedy duo.

The state of the UK housing market has been no laughing matter over the past year or so. But still, it has been shaped by a powerful pairing. Though more bad cop, good cop than amusing double act, the respective parts played by Debt & Equity have taken centre stage, as rising interest rates and buyers’ ability to tap into existing wealth have had an increasing impact on the extent and nature of demand.

Less use of Debt, more reliance on Equity

Of the two, the increased cost of debt has undoubtedly stolen the headlines, curtailing buyers’ budgets and the scale of their property ambitions, across both the mainstream and prime markets.

But, as the cost of debt has risen and become much more sensitive to inflation indicators, so equity has had a greater share of the lines. This has been particularly evident at the top end. While the prime market has become much more price-sensitive, it has continued to function much better than many feared it might.

Still selling when the price is right

Homes have still been selling at the top end, albeit more regularly requiring an adjustment to sellers’ price expectations.

In the first nine months of the year, over 16,800 sales were agreed for property at between £1m and £2m*. In addition, just over 3,800 sales were agreed for homes marketed at over £2m*. Those are 80% and 86% of levels seen in the same period of 2022. Pretty respectable, all things considered.

In contrast, data from UK Finance tells us that in the first six months of the year, the number of mortgages taken out to fund purchases over £1.5m was down -41% on the same period in 2022.

As mortgaged buyers have been more cautious and use of debt for financial planning purposes has become less attractive, so the market has become more weighted to cash. And with a less deep and diverse pool of buyers, activity in the market has been facilitated by a 43% increase in the number of changes to asking price* to bridge the gap between their expectations and the loftier aspirations of sellers.

_{*TwentyCi (publicly marketed stock net of fall throughs & changes to asking price)}

Managing the increase in mortgage costs

While cash buyers have taken advantage of a less competitive market, those with debt have often been more concerned about managing the increase in mortgage costs as their existing deal comes to an end.

However, importantly, we haven’t seen a significant uptick in forced sales.

Some of this has been down to the level of stress testing of finances we saw in the mortgage markets until August 2022, which protected borrowers from taking on unsustainable levels of debt.

But it has also reflected the assistance offered by lenders to extend mortgage terms or provide a capital repayment holiday for those whose household finances become unduly stretched during a period of elevated debt costs.

As a result, the other two Ds (death and divorce) haven’t had to share much of the stage usually reserved for needs-based sellers with debt.

What then of pricing?

On average, values fell by -5.2% over the year to September across the prime regional housing markets, while in London, they have eased back by a more modest -2.1% as demand has refocussed back to the capital.

However, adjustments to asking price have often had to be greater than this in order to gee up a slightly more reserved audience and generate competitive bidding, when prospective buyers seek the security of knowing they are not the only show on the bill.

Restoring the balance

Even though cash and equity-rich buyers have supported ongoing market activity, a change in market conditions is reliant on buyers seeing their buying power grow rather than contract.

After a summer which started with a secondary bout of turbulence in the mortgage markets, the prospect of steady falls in inflation over the next 18 months has reigned in expectations of further rate rises, with the Bank of England voting 5:4 to hold the bank base rate at 5.25% in September. Welcomingly, that has caused some stability to return to the money markets and fixed-rate mortgage costs to ease back.

But, in all likelihood, a really meaningful change in debt costs relies on bank base rates being cut, rather than hitting a plateau. That seems unlikely before the second half of next year, indicating that prices – while most likely bottoming out over the next six months – are unlikely to start their gradual recovery until this autumn and next year’s spring markets have passed.

In the meantime, equity is likely to be delivering the majority of punchlines.

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_{Read the articles within Prime UK Residential – Autumn/Winter 2023 below}