Press release

1 Sep 2022 London, GB

House prices remain resilient to the economy’s challenges – EY ITEM Club comments

The Nationwide measure of house prices grew by a stronger-than-expected 0.8% from July to August. And while annual growth slowed, it remained in double digits for the tenth month in a row. The scale of headwinds facing the housing market means a slowdown in price rises appears likely. But the fact that the market also benefits from some protective factors means the EY ITEM Club thinks house price growth will slow rather than fall outright, despite the economy’s challenges.

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  • The Nationwide measure of house prices grew by a stronger-than-expected 0.8% from July to August. And while annual growth slowed, it remained in double digits for the tenth month in a row. The scale of headwinds facing the housing market means a slowdown in price rises appears likely. But the fact that the market also benefits from some protective factors means the EY ITEM Club thinks house price growth will slow rather than fall outright, despite the economy’s challenges.
  • However, a ‘hard landing’ is a risk if rising inflation were to cause the Bank of England to raise interest rates too far, too fast.
  • The housing market still enjoys some supports. The consequences of increasing cost of living pressures are being borne disproportionately by low-income, primarily renting households rather than better-off homeowners. The dominance of fixed-rate mortgages will also give many of those with home loans time to adjust to higher interest rates. And low unemployment, for now, reduces the risk of forced selling.

Martin Beck, chief economic advisor to the EY ITEM Club, says: “The Nationwide measure of house prices rose a stronger than expected 0.8% month-on-month in August, up from 0.2% growth in July and the biggest monthly gain since May. On an annual basis, prices rose 10%, down from 11% in July, but still the tenth successive month of double-digit growth.

“There’s good reason to think the ability of house prices to defy the economy’s wider challenges won’t last. Mortgages are getting more expensive, with the average interest rate on a new home loan reaching 2.34% in July, a six-year high, up from a low of 1.5% last November. With rising inflation likely to prompt the Bank of England to continue raising interest rates for the foreseeable future, the cost of mortgages is set to continue climbing. And with household incomes experiencing the biggest real-terms squeeze in decades, those with mortgages face a combination of higher outgoings and reduced spending power. 

“But the housing market still enjoys some supports. Eighty per cent of the stock of mortgages have fixed interest rates, so rising mortgage rates will initially affect potential buyers rather than existing owners, with most mortgage-holders having time to adjust to more expensive home loans. Recent strong gains in house prices should ensure most of those on fixed-rate loans can still meet loan-to-value requirements and re-fix their mortgages rather than moving on to more expensive variable rate loans. And the cost of living crisis is disproportionately affecting those at the lower end of the income distribution, who mainly rent rather than own.

“That said, pressure on the housing market is only going to increase in coming months. The EY ITEM Club still thinks that a substantial slowdown in house price growth is more likely than an outright contraction. But the possibility that the Bank of England might respond to high inflation by raising interest rates too far, too fast means the risk of a ‘hard landing’ is growing.”