- Halifax’s measure of house prices in March showed another rise, contrasting with weakness in the Nationwide index, and complicating a reading of the housing market. Taking the Halifax measure in isolation, it offers another sign that the economy is holding up against headwinds from high inflation and rising interest rates much better than many expected.
- Indeed, mortgage approvals and survey evidence of housing transactions both appear to have bottomed out. Signs of green shoots in the economy, still-solid job creation and the large savings held by households are supporting house prices and housing activity. Changes in the structure of the housing and mortgage markets, which have reduced the sensitivity of property values to rising interest rates, are also providing the sector with some protection from headwinds.
- However, 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 there is a risk that banking issues abroad may lead UK lenders to attach tighter conditions to home loans.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “The Halifax measure of house prices has painted a markedly stronger picture than its Nationwide counterpart since the start of the year, a trend which continued in March. According to Halifax, prices rose 1.2% month-on-month in March, versus a 0.8% month-on-month fall in Nationwide’s measure. This still left prices on the Halifax gauge 2% down on the peak last August. However, this was a smaller fall than the 4.6% decline indicated by Nationwide.
“The divergence between the two measures complicates a reading of the housing market. Taking the Halifax measure in isolation, there are reasons why prices may be holding up better than expected. A rise in mortgage approvals in February and better survey data on transactions of late 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. Changes in the structure of the housing and mortgage markets have also 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 mean it will take time for higher rates to affect mortgagees’ outgoings.
“On the other hand, the resilience in prices shown in today’s data may prove fleeting and the EY ITEM Club still expects property prices to drift down this year and into 2024. 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. There’s also a risk that UK lenders may 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 by around 10% peak-to-trough.”