- Although Nationwide’s measure of house prices fell in May, a 0.1% month-on-month decline was small and points to values resisting a serious correction, despite rising mortgage rates. The dominance of fixed-rate mortgages and the sizeable savings built up by households during the pandemic is probably helping. However, with the Bank of England likely to continue raising interest rates, house prices are likely to continue drifting down.
- The market is not out of supports. Strong growth in cash pay has pushed down the ratio of house prices to earnings, unemployment is still very low and consumer confidence has picked up. And rises in rent costs may support demand from first-time buyers.
- However, the chief headwind facing the housing market is likely to intensify. Previous rises in interest rates have yet to feed through in full to existing borrowers. And stickiness in underlying inflation means the Bank of England is likely to raise rates beyond what many were expecting only recently. This would add to what has already been a significant rise in mortgage rates over the last 12 months and compound a still-challenging outlook for household finances.
Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “After Nationwide’s measure of house prices had seen a surprise rise in April, following a sustained run of falls, the downward trend resumed in May. May’s month-on-month fall was marginal at -0.1%, although this left the year-on-year decline bigger at -3.4% compared to -2.7% in April.
“Values are now down 4% from the peak last August, a modest fall given the scale of previous increases and headwinds from rising mortgage rates and falling household real incomes. The dominance of fixed-rate mortgages has protected many mortgagees from an immediate interest rate shock, while the significant savings built up by households overall during the pandemic have provided a cushion of support.
“And the housing market itself isn’t out of supports either. Strong growth in cash pay has pushed down the ratio of house prices to incomes from last year’s very elevated levels. The economic outlook has improved, aided by falling energy prices, with job creation continuing at a solid pace and consumer confidence recovering. And rises in rent costs may support demand from first-time buyers.
“However, the main headwind facing the housing market – rising mortgage rates – is set to build. Around 2.5 million more owner-occupiers will be exposed to higher mortgage rates during 2023 as fixed-rate deals are renegotiated. And recent higher-than-expected inflation data has pushed gilt yields towards levels not seen since the effects of last autumn's ‘mini-budget’, resulting in some lenders announcing increases in the cost of fixed-rate mortgages and withdrawing some products. The EY ITEM Club thinks it is very likely the Bank of England will raise interest rates again this month, and possibly again later in the summer. As a result, the EY ITEM Club thinks house prices are likely to continue drifting down, although avoiding a major correction.”