Housing market’s challenges continue to grow – EY ITEM Club comments

• A 1.4% month-on-month fall in Nationwide’s measure of house prices in November was larger than expected and the largest decline since June 2020. Although the tightening in mortgage market conditions following September’s mini-Budget has eased, the prognosis for house prices and housing activity remains weak.  

• Interest rates on mortgages are well above levels of only a few months ago – a situation which the EY ITEM Club thinks is unlikely to change given the prospect of further rate rises by the Bank of England. Cost of living pressures on households are pushing real incomes down and the EY ITEM Club believes the economy is probably already in recession. 

• However, the EY ITEM Club thinks markets are over-estimating how far borrowing costs will rise. The substantial savings built up by households over the last few years should also provide a cushion against the impact of higher mortgage rates. The EY ITEM Club continues to expect average property prices to fall by around 10% over the next year to 18 months. 

Martin Beck, chief economic advisor to the EY ITEM Club, says: “The repercussions of the financial market turmoil following the mini-Budget, rising mortgage rates and depressed consumer sentiment meant another fall in Nationwide’s measure of house prices in November. The decline was not surprising, but the size of the decline was. A 1.4% month-on-month fall was significantly greater than October’s 0.9% decline and the biggest fall since June 2020. It also pushed annual growth to a 27-month low of 4.4%, down from 7.2% in October. 

“The EY ITEM Club thinks further price falls are likely. Although mortgage rates have retreated from the highs seen just after the mini-Budget, they’re still elevated compared to early-mid September and could head higher again given the prospect of more rate increases by the Bank of England. Cost of living pressures are cutting households’ spending power, which will be exacerbated by tax rises and a reduction in the generosity of the cap on energy bills next April. Consumer confidence, meanwhile, is low. 

“In the EY ITEM Club’s view, one positive comes from market expectations for the peak in the Bank of England rate still looking too hawkish. The EY ITEM Club thinks Bank Rate will top out at no more than 4% early next year, compared to investors’ current expectations of just under 5%. In addition, the ‘excess’ savings built up by households since 2020 should provide some cushion against rising mortgage rates. Therefore, while the EY ITEM Club expects average property prices to fall further, the decline should be limited to around 10%.”