House price growth continues in February, but headwinds build – EY ITEM Club comments

• 2022 continued to deliver growth in house prices, with the Nationwide measure rising 1.7% month-on-month in February, much stronger than expected. This took annual growth to 12.6% and left the average property price at a record high of £260,230.
• But headwinds to further price growth have built. The recent rise in energy prices means household real incomes face an even tighter squeeze from rising inflation. And uncertainty stemming from international events is likely to depress consumer confidence from already-downbeat levels.
• Global uncertainty may lead the Bank of England’s Monetary Policy Committee to take a more cautious approach to raising interest rates. So mortgage costs may not climb as quickly as previously expected. But the EY ITEM Club thinks 2022 will be a year of slow growth in house prices in comparison with the last few years.

Martin Beck, chief economic advisor to the EY ITEM Club, says: 

“After January delivered an 0.8% month-on-month rise in Nationwide’s measure of house prices, growth continued in February. The rate of increase rose to 1.7%, the strongest since last August. This pushed the annual rise in prices up to 12.6%, and left the average property value at £260,230, the highest on record. 

“However, the potential for continued growth in house prices faces new headwinds. The recent rise in energy prices points to inflation peaking higher, at close to 8%, and staying high for longer, than previously expected. The corresponding squeeze on household incomes will be more intense, meaning fewer people will be able to afford to borrow the necessary amount they need to buy at higher mortgage rates. And consumer confidence, already affected by cost of living concerns, is likely to be sensitive to geopolitical uncertainty.

“Granted, the spending patterns and savings of those on higher incomes, who are more likely to be in the market for buying a property, are less exposed to the rising cost of essentials than the lower-paid. And global uncertainty and the impact to consumer demand from the squeeze on real incomes may also cause the Bank of England to proceed more cautiously in raising interest rates, with a knock-on effect on mortgages. In particular, it is looking more uncertain whether the committee will raise Bank Rate in March, as was widely expected. The EY ITEM Club continues to think that Bank Rate will rise to no more than 1% by the end of this year. But overall, while the cost of mortgages may rise more slowly than had been expected, the outlook for the housing market is looking less buoyant.”