September’s fall in house prices is likely to be a sign of things to come – EY ITEM Club comments

• A 0.1% month-on-month fall in Halifax’s measure of house prices in September was marginal in the context of the significant rises in values in recent months and years. However, the adverse factors now affecting the housing market point to more declines in house prices ahead. 

• Those headwinds include the cost of living squeeze, the rise in mortgage rates since the recent 'mini-Budget', and a fall in the availability of mortgage products following September’s gilt market volatility. 

• Granted, the EY ITEM Club thinks current market expectations for Bank Rate to reach around 5.5% next year are too high, while the success of the Bank of England’s intervention in lowering gilt rates appears to be prompting lenders to bring back some mortgage 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 significantly in its next few meetings, with adverse consequences for the housing market.  

Martin Beck, chief economic advisor to the EY ITEM Club, says: “A 0.1% month-on-month fall in Halifax’s measure of house prices in September was slightly different from the stagnation shown in Nationwide’s gauge in the same month and suggests that the housing market was losing steam even before the recent volatility in financial markets. September’s reading left the annual rise in the Halifax index at 9.9%, the first single-digit reading since January.  

“Weakness in prices in September is likely to be a sign of things to come, reflecting cost of living pressures and the recent rise in market interest rate expectations and mortgage rates. Granted, current market expectations for Bank Rate to rise to 5.5% by mid-2023 look too high. 

“Raising rates to that level would likely prompt a substantial decline in 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 significantly reduce demand for properties and decrease the size of loans that lenders can offer. Combined with the weakening economic outlook and squeezed household incomes, the EY ITEM Club expects property values to fall by 5% or more over the next year or so. 

“With the average house price having risen 25% since the start of 2020 alone, such a fall would not be overly problematic. However, it would likely prompt a more cautious attitude among potential buyers and lenders and have a long-lasting dampening effect on the property market, even if the easing in market turbulence is sustained and market interest rates fall back to levels more consistent with the economic outlook.”