- Nationwide’s measure of house prices in June was broadly flat. But given the scale of previous price gains and the headwinds facing the housing market from rising mortgage rates and other financial pressures, house prices continue to display a surprising degree of resilience.
The EY ITEM Club thinks that resilience will likely fade, at least to a degree. The increase in mortgage rates over the last month, if sustained, will increase the challenges faced by those renegotiating fixed rate mortgages and could cause a bigger fall in prices than the 10% peak-to-trough decline in values the EY ITEM Club expects.
However, the EY ITEM Club thinks a serious house price crash is still unlikely. An improving inflation outlook means market expectations that the Bank of England will raise rates to over 6% look too pessimistic. Households’ financial position, in aggregate, is much healthier than the last time interest rates rose on a sustained basis, and unemployment is low. And measures to help mortgagors, such as facilitating moves to interest-only home loans, will soften the impact of higher rates.
Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “A 0.1% month-on-month rise in Nationwide’s measure of house prices in June reversed the 0.1% fall of the previous month, but left prices down 3.5% on a year earlier. Prices were also 4% lower than the peak last August. But this eroded only a small part of the near-25% rise in values between the start of 2020 and mid-2022.
“The EY ITEM Club is doubtful that house prices will remain so resilient. The reaction of financial markets to a series of upside surprises for inflation and pay growth has caused interest rate expectations to climb. As a result, since the start of June, two-year and five-year swap rates have risen by 90bps and 60bps respectively, and this is increasingly feeding into higher mortgage interest rates.
“The rise in swap rates reflects market views that the Bank of England will continue to raise rates significantly, with Bank Rate now expected to peak at 6.25%. But the EY ITEM Club thinks an improving inflation outlook means the market view is too pessimistic, and that rates will stabilise after one or two further rises by the Bank of England. If the EY ITEM Club’s expectations are accurate, mortgage rates should fall back during the second half of this year, albeit to levels still high by the standards of the last decade or so.
“And there are other reasons to think that, while house prices are likely to drift down, a serious correction should be avoided. The financial position of UK households in aggregate is unusually healthy, reflecting the deleveraging and high savings rates of recent years. Mortgages are disproportionately held by better-off households, a group which also holds most of the sizeable unplanned savings built up during the pandemic. The recent decline in house prices, alongside strong growth in cash pay, means house prices relative to earnings have fallen. This should go some way to supporting demand against opposing pressure from higher mortgage rates. And the Government has announced a package of measures in conjunction with the major lenders aimed at reducing the immediate impact on mortgagors from higher borrowing costs and keeping repossessions down.”
