More evidence of resilience in house prices – EY ITEM Club comments

• The Halifax measure of house prices joined its Nationwide counterpart in showing a robust rise in values in August. Headwinds facing the housing market suggests a slowdown in price rises seems very likely. But support to households from a likely cap on energy bills means the EY ITEM Club is more confident that a substantial correction in prices will be avoided.

• 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.  

• That risk should fall if the speculated cap on energy bills cap materialises. By reducing the prospective peak in inflation and dampening inflation expectations among the public, a cap could encourage the Bank of England to take a less hawkish approach to raising rates. The EY ITEM Club still expects the Bank of England to increase Bank Rate by 50bps in September's meeting. But the likelihood of a bigger rise has probably fallen. 

Martin Beck, chief economic advisor to the EY ITEM Club, says: “A 0.4% month-on-month rise in the Halifax measure of house prices in August wasn’t a strong as Nationwide’s 0.8% gain, but still suggests a housing market which, so far, appears to be shrugging off the headwinds dragging on the economy. Annual growth slowed to 11.5% from 11.8% in July but was still very strong by the standards of the last decade.  

“House prices are unlikely to defy the economy’s wider problems indefinitely. Mortgages are getting increasingly 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. And with household incomes experiencing the biggest real-terms squeeze in decades, those with mortgages face challenges from higher outgoings and reduced spending power.  

“However, the prospect of a cap on household energy bills should improve the outlook on both counts. If speculation about the scope of the cap proves true, inflation should peak at a much lower rate than had been expected, while the economy would avoid the squeeze on real incomes there would have been had the energy price cap risen to the £5000-£6000 levels wholesale gas prices were previously implying. 

“Moreover, by reducing the prospective peak in inflation and dampening inflation expectations among the public, a cap might encourage the Bank of England to take a less hawkish approach to raising rates, with knock-on consequences for the cost of mortgages. That said, by boosting disposable incomes relative to expectations, the cap may raise medium-term price pressures. So the EY ITEM Club still expects the Bank of England to increase Bank Rate by 50bps in September's meeting. But the odds of a larger 75 bps rise, which some had been predicting, or rates rising to over 4% by early next year, which market expectations had recently implied, have fallen.”