- Given the lag between rising mortgage rates and house prices, a 0.9% month-on-month fall in Nationwide’s measure in October shouldn’t be taken as a conclusive judgement on the effect of recent financial market turbulence.
- But with interest rates on mortgages still well above the levels of only a few months ago and cost of living pressures on households significant, October’s fall in values is a likely prelude to further falls.
- However, calmer markets, less pressure on the Bank of England to raise interest rates substantially and some fallback in mortgage rates from September’s peak have all reduced the extent of the prospective decline in property values. The EY ITEM Club expects average prices to fall by around 5%-10% over the next year or so.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “Given the recent challenges for the housing market from financial market turmoil, an associated rise in mortgage rates, and concerns that the Bank of England may opt for a particularly significant rise in interest rates in November, a 0.9% month-on-month fall in Nationwide’s measure of house prices in October did not come as a surprise. This was the first fall since July 2021 and the largest since June 2020. Annual growth stood at 7.2%, down from 9.5% in September.
“October’s fall could likely be a sign of things to come. Although mortgage rates have retreated from the highs seen just after the mini-budget, they’re still elevated compared to early-mid September. For example, the current standard variable rate on a Nationwide mortgage is 5.24%, compared to 3.74% pre-mini-budget. Cost of living pressures remain challenging, and face being exacerbated by tax rises and public spending restraint in November’s Autumn Statement, and consumer confidence is notably depressed.
“However, the extent of the likely fall in house prices has retreated over the last few weeks. A return to calmer sentiment in the financial markets and the Government’s change of tack on fiscal policy mean the odds of the Bank of England announcing an especially large rise in interest rates in its meeting later this week has receded. If that expectation materialises, mortgage rates would be expected to fall back further. The market also still appears too hawkish as to where it expects the Bank of England rate to peak. The EY ITEM Club thinks Bank Rate will top out at no more than 4% early next year, compared to investors’ current expectations of 5%.
“Moreover, it’s still the case that cost of living challenges are most pressing for low-income, primarily-renting, households, not better-off home owners, many of whom have savings accumulated during the pandemic to draw on. So, while the EY ITEM Club expects average property prices to fall further, the decline is likely to be restricted to 5%-10%.”