Challenges in the housing market are set to continue, with extreme care needed to navigate the next few months, a leading accountant has warned.

Property owners, sellers, buyers, landlords and tenants are all affected by turbulence in the sector, said Tom Young, associate director at Hampshire accountancy firm HWB.

Tom points to a range of factors suppressing market activity including stubbornly high inflation, rises in mortgage rates, declining house prices and rental yields, and potentially tighter constraints on lending.

At the same time, there remain opportunities to mitigate some of the pressures with the correct advice and a careful plan of action, he said.

Concerns have continued to grow since the latest Bank of England data painted a subdued picture of mortgage lending and home buying.

While inflation persists at 6.7%, disposable income has become lower for millions of people and those with higher mortgage rates are seeing their cost of living rise still further.

“The cost of borrowing is now at its highest level since the 2008 financial crisis,” said Tom, a property sector specialist. “The combination of the increased cost of living and mortgage rates has led to many individuals deciding to pay off lump sums of their mortgages rather than move. This has contributed to the decline in the housing market and prices."

“On the face of it, lower house prices may seem like good news for prospective buyers but not if it is offset by higher mortgage payments."

“We’re already seeing the level of mortgage arrears at a seven-year high, a clear indication of pressure on affordability, and the number of new mortgage loans declining markedly.”

There are signs that rates may be close to a plateau, with the Bank of England keeping interest rates at 5.25% in September 2023 after 14 successive increases since December 2021. This has prompted some mortgage lenders to cut fixed rates for two and five-year terms.

Tom said: “It’s therefore possible that buying a home could become more affordable in future but, at the moment, prices have generally not decreased enough to balance out the higher interest rates. We are certainly seeing an increase in enquiries from people looking to mitigate property sector pressures."

“Many of those who took advantage of the Stamp Duty holiday during Covid will now be renewing their mortgage terms and be faced with a steep increase in repayments."

“And owners of highly geared properties, where the level of debt versus equity is high, could end up with the pain of negative equity. We’re also seeing mortgage providers becoming more stringent before they approve loans, carrying out additional checks on risk profiles and requesting cash flow forecasts while they ‘stress test’ the ability to make repayments.”

Tom said that some prospective buy-to-let (BTL) landlords, if they have equity backing and can ‘ride the storm’ of higher interest rates, could purchase properties at favourable levels at a time when prices are falling.

“But they should factor in the risk of a squeeze on rental yields if tenants struggle to keep up rent payments,” he said. “It’s inflation and the overall cost of living that is making this such a challenging time in the market.”

Tom added that one way BTL landlords can mitigate the risk of mortgage interest is by purchasing the property using a company or incorporating an existing portfolio.

“Companies do not incur the same restrictions on claiming mortgage interest against rental profits as individual landlords,” he said. “It is therefore worth running the calculations to ascertain whether it is best to purchase the property as an individual or in a company."

“There are many other factors that should be taken into consideration. For example, mortgage rates for individuals tend to be lower than that offered to a company and you have to consider Stamp Duty Land Tax and Capital Gains Tax. The best advice is to engage a tax adviser to run the calculations. Our message overall is that if you are worried about a property transaction during this time of market uncertainty, an independent expert is best placed to help.”

HWB Chartered Accountants, based at Chandler’s Ford, near Southampton, advises individual landlords and property developers on the ever changing aspects of accounting and tax legislation.