House prices outlook significantly changed over the last week – EY ITEM Club comments

• A modest slowdown in the Nationwide measure of annual house prices in September is likely to be the precursor to a more significant weakening in house prices and housing market activity.

• The rise in mortgage rates since the recent 'mini-Budget', the withdrawal of many mortgage products prompted by volatility in the gilt market, and the worsening economic outlook all point to a significant slowdown in transactions and lending, and a probable fall in property prices ahead. 

• Granted, the EY ITEM Club thinks current market expectations for Bank Rate to reach close to 6% next year appear too high, while Bank of England intervention to lower gilt rates should prompt lenders to bring back some products. But looser fiscal policy and averting the inflationary risks of further sterling weakness mean the Monetary Policy Committee (MPC) is likely to raise interest rates substantially in its next few meetings, with consequences for the housing market. 

Martin Beck, chief economic advisor to the EY ITEM Club, says: “September saw Nationwide’s measure of house prices flatline on a monthly basis, pushing down annual growth to 9.5% from 10% in August. This was the first single-digit reading since last October.

“September’s slowdown is likely to be the precursor to a more sizeable weakening in house price growth and housing market activity, reflecting the recent rise in market interest rate expectations and mortgage rates. Granted, the near-6% Bank Rate currently expected by markets by mid-2023 looks too high. 

“Raising rates to 6% would likely prompt significant consequences for the housing market, a deep recession and inflation eventually falling well below the Bank of England’s 2% target and potentially into negative territory. Instead, the EY ITEM club expects Bank Rate to peak at 4%. However, rates at that level would still be likely to substantially reduce demand for properties and decrease the size of loans that lenders can offer. Combined with the weakening economic outlook and intense cost of living pressures, the risk of a double-digit fall in house prices seems to be becoming more real.  

“With the average property price having risen 25% since the start of 2020 alone, such a decline would not be as significant as it sounds. But it would likely lead to a more cautious attitude among potential buyers and lenders and have a long-lasting dampening effect on the property market, even if we were to see a full reversal to the economic and financial conditions of early last week.”