Homebuyers have had to scramble to find extra cash as lenders “downvalue” mortgage offers amid signs the house price boom is turning.
The share of sales held up because lenders refuse to meet prices agreed between buyers and sellers has tripled in some areas, as the cost of living crisis sparks fears property values will fall.
Banks and building societies agree to lend a fixed percentage of the value of the property. If they think a property is not worth the price agreed between buyer and seller, their mortgage offer is reduced correspondingly.
Adam Kingswood of Kingswood Residential Investment Management, which runs a portfolio of 450 homes in Nottinghamshire on behalf of investors, said the share of local sales getting downvalued had jumped from 5pc to 15pc since the pandemic began. “A lot of lenders are apprehensive that we are at the peak of the curve,” he said.
Chris Sykes of Private Finance, a mortgage broker, said: “Downvaluations have cropped up in the past few months. That is uncommon in a buoyant market.”
Martin Stewart of London Money, another broker, said: “I think we will start seeing more downvaluations because there is a thing called gravity. We have crossed the Rubicon between sellers’ expectations and the realistic valuations of the lender.”
Most downvaluations have occurred outside London in the areas that recorded the steepest house price growth during the pandemic, said Mr Sykes. He noted the purchase of a house in Somerset that was agreed at £861,000 but was downvalued to £800,000, a drop of 7pc. A house in Surrey was downvalued from £500,000 to £470,000 and a home in Kent by more than 10pc from £380,000 to £340,000, he added.
An acute shortage of homes for sale has made desperate buyers push their budgets to extremes just to secure somewhere to live.
One 32-year-old reader and his fiancée made an offer of £880,000 for a five-bedroom house in south-east London in February. “It didn’t even go to market, we saw it on a day of pre-viewings,” he said. Their offer was accepted, but then their lender downvalued the property by £30,000. “Our broker said it was the third downvaluation she had seen that morning.”
The couple’s attempts to renegotiate with the seller were rebuffed. “They could afford to do this because they knew they had so many buyers. We had to completely exhaust our savings to make up the difference in cash,” the buyer said. In many situations the market is so hot that cash buyers are simply stepping in when mortgage offers fall through, said Mr Kingswood.
But in some cases sales are collapsing. Stewart Paterson, 29, had a £350,000 offer on a maisonette in north-east London accepted last summer, but his lender’s valuation came in at £40,000 less. “The seller refused to budge, so we had to pull out,” said Mr Paterson.
The trend reflects the contrast between the current state of the market and analysts’ expectations of a slowdown next year.
While one forecaster, the Centre for Economics & Business Research, has just upgraded its house price growth forecast for 2022 from 3.8pc to 4.8pc, following a stronger than expected start to the year, it has downgraded its longer-term outlook because of the worsening cost of living crisis. At the start of last month it forecast a 0.6pc house price fall next year. Now it expects a drop of 2pc.
In Wales and the north of England, which saw some of the strongest house price growth during the pandemic, the consultancy has forecast drops of up to 4pc. The London market will be the most robust as it experienced the lowest price growth during the pandemic, it said.
Karl Thompson from the CEBR said: “Higher inflation will lead to bigger falls in house prices.” As inflation rises and depresses real earnings, it will also bring pressure for the Bank of England to raise interest rates, which would increase mortgage costs.
Mr Thompson said unemployment would rise from 3.9pc today to 4.6pc by the end of the year, partly because of the fallout from Russian sanctions.
“Downvaluations are red flags we are reaching some kind of turning point in the market,” he said.
But demand still far outweighs supply. “Sellers are overambitious, but people are desperate to complete a sale so they overbid,” he added.