Higher mortgage rates are set to hit household buying power, according to analysis from Zoopla.

The property portal said the housing market is ‘slowly transitioning to a buyers market’ as asking price reductions return to pre-pandemic levels.

Despite a hugely volatile week in the mortgage market, UK house growth remains stable at 8.2% year on year, said Zoopla, although cost of living pressures are impacting affordability.

It added that, some regions, including Wales, the North East and Scotland have seen 10 years of growth compressed into just two over the pandemic

Rising mortgage rates

However, rising mortgage rates will impact buying power and, according to Zoopla this is the ‘most important factor for the housing market this autumn’.

If mortgage rates reach 5% by the end of the year, and assuming buyers want to keep their monthly repayments unchanged, buying power would be reduced by 28%. Higher mortgage rates will have the greatest impact on buying power in high-value markets in London and the South East.

The Stamp Duty tax cut will offset some of the extra costs of buying, plus buyers have three options:

1. Put down a larger deposit if they have the money
2. Allocate more of their income to mortgage costs, if possible
3. Adjust their budgets and consider buying a smaller property or purchasing in a cheaper area.

Richard Donnell, executive director at Zoopla, said: “Measures of housing market activity have been very resilient over the summer. A surge in home values over the pandemic and the rise of mortgage rates means we face a sizable hit to household buying power over the rest of 2022 and into 2023.

“While the recent changes to stamp duty are welcome, supporting activity in regional markets and the first time buyer market in southern England, the increase in mortgage rates will erode much of the gains. Homeowners that want to sell their home this year need to price realistically and seek the advice of an agent on local market trends.”

Director of Benham and Reeves, Marc von Grundherr, added: “Higher mortgage rates are just one factor contributing to the cost of living crisis, but they’re certainly the most influential factor when it comes to the purchasing power of the nation’s homebuyers.

“The market is now at a bit of a tipping point where house prices have continued to increase rapidly, but the reality for many buyers is that they are no longer able to stretch themselves financially. This should be an important consideration for those looking to sell and a consideration that must be made when setting your asking price.”

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown, said: “When the dust settles on the chaos in the mortgage market, the ground will have shifted, and fixed rates will have risen significantly. The impact on buying power will mean some incredibly difficult decisions for homebuyers, who could end up with smaller ambitions or horribly tight budgets. This is going to take a toll on the market.”