Nationwide’s measure of house prices fell in March for the seventh month in a row, pushing annual growth deeper into negative territory. Although there have been signs recently that weakness in housing market activity may have bottomed, rising mortgage rates mean the EY ITEM Club thinks property values will continue to fall. And were bank lending standards to tighten in response to global financial volatility, that fall could potentially prove bigger than anticipated.
Signs of green shoots in the economy, still-solid job creation and the large savings held by households, in aggregate, mean the risk of a serious correction in house prices strikes the EY ITEM Club as small. Changes in the structure of the housing and mortgage markets, which have reduced the sensitivity of property values to rising interest rates, also offer protection.
But prices still look very stretched on most affordability measures. The average interest rate on a new mortgage has increased by over 250 basis points in only 12 months. And international banking challenges could lead UK lenders to attach tighter conditions to home loans. On balance, the EY ITEM Club expects average property prices to fall by around 10% peak to trough.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “A 0.8% month-on-month fall in Nationwide’s measure of house prices in March was the seventh consecutive monthly decline and left average values 4.6% below the peak last August. March’s fall also pushed annual growth further into negative territory. Prices were down 3.1% on a year earlier, the biggest decrease since July 2009.
“Nationwide’s measure has recently painted a much weaker picture than its Halifax counterpart, which has shown prices rising early this year, so the latest reading should be interpreted with caution. And the EY ITEM Club thinks the risk of a major correction in prices is low. A rise in mortgage approvals in February suggests that weakness in housing market activity may have bottomed out. The economy is showing increased signs of health, aided by falling energy prices, with job creation continuing at a solid pace and consumer confidence recovering. And changes in the structure of the housing and mortgage markets have reduced the sensitivity of property values to rising interest rates. The share of households who own their home outright has risen since the last time mortgage costs rose on a sustained basis. And the dominance of fixed-rate mortgages means it will take time for higher rates to affect mortgagees’ outgoings.
“However, the EY ITEM Club still expects property prices to drift down this year and into 2024. Still, house prices remain very high on most measures of affordability. Mortgage rates have seen a significant rise over the last year, with the average rate on a new mortgage increasing to 4.26% in February from 1.60% 12 months earlier. And UK lenders might respond to recent global financial challenges by tightening lending criteria and reining back mortgage availability, while confidence among potential home buyers could be affected. On balance, the EY ITEM Club sticks with its view that prices will decline around 10% over this year and next.”