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Rising cost of living – how has it affected the home-buying market?

  1. 22 April 2022
  2. By Jeremy Greer

The current cost of living crisis is arguably the biggest squeeze on living standards since the 1950s.  



April has been a tough month for many households, due to the increase in the energy cap, along with soaring inflation and the rise in national insurance contributions. 

Meanwhile, interest rates are steadily increasing, and Russia’s invasion of Ukraine is continuing to push up the price of gas and oil.  

Millions of British households are finding their finances stretched like never before.  

So, how could the rising cost of living affect home-buying? 

What is happening? 

Due to global pressures from Covid and the war in Ukraine, the Government increased the energy price cap earlier this month, leaving millions of households facing much higher gas and electricity bills. 

The energy price cap increased from April 1 for approximately 22 million customers, with those on default tariffs paying by direct debit seeing an increase of £693 from £1,277 to £1,971 per year (difference due to rounding), while prepayment customers have seen an increase of £708 from £1,309 to £2,017.  

This rise is being driven by a record increase in global gas prices over recent times, with wholesale prices quadrupling in the last year alone. 

The changes have affected default tariff customers who haven’t switched to a fixed deal and those who remain with their new supplier after their previous supplier exited the market. 

Many smaller energy companies have left the market or been put in special administration in the wake of soaring global gas prices, impacting approximately 4.3 million domestic customers. 

According to the Guardian, the rise in costs represents the biggest rise in energy bills in living memory, with most UK households affected. 

The paper says that the April 1 increase is only the beginning as prices are expected to go up again in six months’ time, with the war in Ukraine – occurring after the original increase had been announced – likely to send prices even higher. 

July will see staff from regulator Ofgem begin to calculate what it thinks the new price cap should be based on the wholesale costs. The Guardian says that unless there is a remarkable reversal in the market, experts are warning the new cap will be at about £2,500-£3,000 a year. 

As well as rising energy bills, the cost of everyday essentials such as food, clothing, mortgage repayments, rent, petrol and water is also on the rise as inflation continues to bite. 

While energy bills are experiencing the starkest rise, council tax on a band D property in England also rose by nearly 4% from April 1, water bills in England and Wales will be rising by an average of 1.7% to £419 and broadband, phones and TV bills have also increased as well, up by more than 9% in many cases.  

Is the Government offering any support? 

The Chancellor has said those who pay council tax, and live in bands A-D, will receive a £150 rebate from this month. Those who live in homes in bands E to H could also qualify if they receive certain benefits.  

Households who pay their council tax by direct debit will receive the £150 directly into their bank account from their local council. Those who don’t currently do this are encouraged to do so, as it will make it easier to get the money. Those not paying by direct debit will need to apply for the rebate manually, which could make more time and hassle. 

In October, meanwhile, energy customers will see £200 slashed from their bills. However, they will need to repay that back over the next five years. 

Rishi Sunak has been criticised from all sides for not doing enough, with his recent Spring Statement even panned by usually supportive sections of the media and some of his own MPs. 

Is this affecting homebuying? 

Although the above paints a bleak picture, with millions struggling to cope with the cost of living crisis, is it having any direct impact on those looking to purchase homes? 

According to Jonathan Rolande, a founder member of the National Association of Property Buyers, surging costs means the ‘bumper year’ many homeowners were expecting won’t happen. 

Mr Rolande predicts that average house prices will now dip under the rate of inflation, in effect meaning a real-terms reduction. 

“Had it not been for the cost-of-living crisis and the impact of world events, 2022 would have been a bumper year for the property market with cheap, easily accessible mortgages and no let-up in buyer demand,” he commented. 

He added: “However, 2022 isn’t shaping up as many had hoped and instead of a potential 4% to 6% rise this year, we will likely see much reduced growth, nationally of around 2% to 3%. This is lower in fact than general inflation will be, so in real terms, this a reduction. London prime residential will take a near instant hit thanks to sanctions on wealthy Russians.” 

While UK prices hit another record high of £282,753 in March, experts expect this to ease over the next year as homebuyers face higher interest rates and the cost of living squeeze. 

High street lender Halifax said the average cost of a home in March 2022 rose by 1.4% on February, according to its monthly property index. This is 11% higher than a year ago, making it around the largest annual rise since the 2007 financial crisis. 

March was the ninth consecutive month that prices have grown, with monthly gains at their highest level since September, when they rose by 1.7%, the bank said. What’s more, average prices have increased by £43,577 since the first Covid-19 lockdown in March 2020, driven by the race for space and a chronic shortage of houses for sale. 

At the same time, Halifax has warned that the cost of living crisis – seeing households squeezed by rising energy and day-to-day bills – is likely to dampen the increase in house prices over the coming year. 

The Bank of England has said inflation could reach as high as 10% this year, increasing the pressure on living standards and likely to lead to another rise in interest rates as the Bank tries to keep a hold on prices. Interest rates have already returned to pre-pandemic levels of 0.75%, with more rises expected. 

“In the long term, we know the performance of the housing market remains inextricably linked to the health of the wider economy,” Russell Galley, Halifax’s managing director, said. “There is no doubt that households face a significant squeeze on real earnings, and the difficulty for policymakers in needing to support the economy, yet contain inflation, is now even more acute because of the impact of the war in Ukraine. 

“Buyers are therefore dealing with the prospect of higher interest rates and a higher cost of living. With affordability metrics already extremely stretched, these factors should lead to a slowdown in house price inflation over the next year.” 

Falling house prices or a slowdown in a market that has been rampant in recent years may be good news for house buyers looking to get on the ladder, but equally the cost of living crisis could put many off. 

For now, demand continues to strongly outstrip supply, but if the squeeze worsens this trend could start to reverse, leading to consequences for property sellers and estate agents. 

There are no signs yet that the cost of living crisis is feeding into the property market in a big way. But as an increasing number of households feel the pinch over the next few months – with the price of utilities soaring – this could all change. As such, the calls for Government to offer more assistance will remain loud. 

 

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