Press release

6 Jan 2023 London, GB

House prices continued to fall at the end of 2022 – EY ITEM Club comments

Martin Beck, Chief Economic Advisor to EY ITEM Club, provides comments on the latest public finance news.

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  • The Halifax measure of house prices joined its Nationwide counterpart in showing a fourth consecutive month-on-month decline in property values in December, the weakest run since 2008. The 1.5% fall in December pushed down annual growth to 2% – the lowest since the summer of 2020.
  • The trend of falling house prices in late 2022 is likely to persist throughout this year. Mortgage rates are significantly higher than 12 months ago, high inflation is reducing households’ spending power, and the downbeat prospects for the economy and outlook for house prices are likely to deter some from entering the housing market.
  • However, changes in the structure of the housing and mortgage markets and the prospect of a relatively modest rise in unemployment should avert a significant fall in house prices. The EY ITEM Club expects 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: “Following a succession of monthly falls in house prices in the autumn and early winter, the Halifax measure saw another decline in December. Granted, a 1.5% month-on-month fall was smaller than a decline of 2.4% in November. However, a fourth consecutive monthly fall was the weakest run since 2008, when the impact of the global financial crisis was building. Halifax’s measure was consistent with the message of Nationwide’s gauge, which also fell in December for the fourth month in a row.

“Property prices are likely to continue falling for the foreseeable future. Although mortgage rates have retreated from the highs in the aftermath of late September’s ‘mini-Budget’, they are still elevated compared to earlier last year and the prospect of another rate increase by the Bank of England in February could lift borrowing costs further. Cost of living pressures are cutting households’ spending power and will be exacerbated by tax rises and a reduction in the generosity of the cap on energy bills in April. Meanwhile consumer confidence is very downbeat.

“However, several factors should limit the decline in prices compared to the last time interest rates rose on a sustained basis. One is that fewer households are exposed to higher mortgage rates. The share of households who own their home outright has risen, standing at 34.8% in 2021-22, up from 30.3% in 2005. Over the same period, the proportion of households with a mortgage fell to 29.5% from 40.3%. Combined with Bank of England data which suggest that while half of mortgagees (or just over 4m households) will face higher interest rates this year, the growth of fixed-rate mortgages mean half will not see their debt servicing costs rise until 2024 or later.

“Meanwhile, the EY ITEM Club thinks unemployment will see only a modest rise over the next year or so, reducing the risk of a serious fall in prices. With job vacancies still high and surveys suggesting a shortage of workers in some sectors, employers may choose to hold on to labour during the downturn. At the same time, greater forbearance by lenders, such as switching mortgage holders to interest-only deals, should reduce the prevalence of forced selling. Overall, the EY ITEM Club thinks think average property prices will fall by around 10% over the next 12-18 months.”