- An unexpectedly large 0.8% month-on-month fall in Nationwide’s measure of house prices followed continued weakness in mortgage approvals and lending, suggesting the impact of rising interest rates is building. The fact that the official Bank of England rate is likely at, or close to, a peak means the drag from this source shouldn’t intensify too much further. But the EY ITEM Club expects house prices to continue to deflate over the rest of this year and into 2024.
- That decline should prove more of a slow puncture than a serious correction. The predominance of fixed-rate home loans means average mortgage rates are creeping up only slowly, cushioning the impact. Household finances overall are unusually strong, cash pay is rising fast, unemployment is still fairly low and more borrowers are extending mortgage terms.
- But these positives face a significant offset in the scale of interest rate rises by the Bank of England and the likelihood that rates will stay at current levels for some time. As a result, housing market activity seems destined to remain sluggish for the foreseeable future. The EY ITEM Club continues to expect a peak-to-trough fall in house prices of around 10%.
Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “After a run of modest on-and-off falls in Nationwide’s measure of house prices in recent months, August delivered an unexpectedly large decline. A 0.8% month-on-month fall was double July’s 0.4% fall and left average values 5.3% lower than a year earlier, the biggest annual decline since July 2009.
“Following on from the recent data showing continued weakness in mortgage approvals and mortgage lending, July’s further decline in prices suggests the impact of past rises in interest rates is building. But the EY ITEM Club still expects more of a slow puncture than a serious correction in house prices. The predominance of fixed rate mortgages is slowing the pass-through of higher market interest rates into rates paid by mortgagors. And growing signs of a weakening economy and disinflationary pressures mean the current cycle of interest rate rises is likely at, or close to, an end. So, the drag on the housing market from rate increases appears unlikely to intensify much further.
“Meanwhile, the financial position of UK households is unusually healthy, reflecting the deleveraging and high savings rates of recent years. The recent decline in house prices, alongside strong growth in cash pay, means house prices relative to earnings have fallen. And the share of borrowers extending mortgage terms – which reduces the immediate effect of higher rates – is growing. These factors should support demand and reduce the extent of forced selling, limiting how much further house prices fall.
“But the scale of that impact from high interest rates (the average interest rate on a new mortgage rose to 4.66% in July, 233bps higher than a year earlier) points to property values continuing to deflate. And signalling from the Bank of England implies that while interest rates may be close to peaking, they will stay at current high levels for some time. On balance, the EY ITEM Club continues to think falls in house prices will persist over the rest of this year and into 2024, with values ultimately declining by around 10% from peak to trough.”