- The Halifax measure of house prices in January was stronger than its Nationwide counterpart, showing prices flatlining, rather than falling. However, this followed four consecutive months of decline, and given the headwinds facing the housing market, January’s stability could prove only a temporary interruption in advance of a further fall in prices.
- Although mortgage rates have dipped from post-mini-Budget peaks, they’re still at the highest in a decade. Households’ ability to service debts is being squeezed by falling real incomes, and widespread predictions of a further decline in property values will likely encourage some potential buyers to delay purchasing, weighing on demand.
- On the other hand, changes in the structure of the housing and mortgage markets and the prospect of a relatively modest rise in unemployment should reduce the risk of forced selling. The EY ITEM Club expects average property prices to fall by around 10%, peak to trough, but a bigger decline is now looking less out of the question.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “The Halifax measure of house prices stabilised in January after a run of month-on-month falls in late 2022. This was a stronger performance than the Nationwide index, which showed prices falling 0.6% month-on-month in January – the fifth consecutive monthly decline. Annual growth on the Halifax measure slipped to 1.9% from 2.1% in December.
“January’s flatlining in values may prove only a temporary interruption to a trend of falling prices. Although mortgage rates have dipped from post-mini-Budget peaks, they’re still at their highest in a decade. The average interest rate on a new mortgage ended 2022 at 3.68% – up from 1.59% 12 months earlier. Rates on larger mortgages have seen much bigger increases. For example, the average quoted rate for a two-year fix at 90% loan-to-value was 5.96% in December, 400bps higher than at the start of the year. Meanwhile, households’ ability to service debts is being squeezed by falling real incomes, and widespread predictions of a decline in property values are expected to encourage some potential buyers to wait before purchasing, weighing on demand and potentially making expectations of price falls self-fulfilling.
“However, the EY ITEM Club still thinks a significant correction in prices is likely to be avoided. Fewer home-owners are exposed to higher mortgage rates and 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% and the dominance of fixed-rate mortgages means it will take time for higher borrowing costs to affect mortgagees’ outgoings. Bank of England data suggest that while half of mortgagees, or just over 4mn households, will face higher interest rates this year, 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 in 2023, reducing the risk of a substantial fall in prices. With job vacancies still high and surveys suggesting a shortage of workers in some sectors, employers may choose to keep rather than shed labour during the downturn. As a result, the Labour Force Survey jobless rate is forecast to peak at less than 5% and greater forbearance by lenders, such as switching mortgage holders to interest-only deals, is expected to reduce the prevalence of forced selling. Overall, the EY ITEM Club thinks average property prices will fall by around 10% peak-to-trough.”