- Halifax’s measure of house prices in June showed values broadly flatlining on the previous month, mirroring the performance of its Nationwide counterpart. 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. The rise in mortgage rates over the last month, if sustained, will increase the challenges faced by those renegotiating fixed rate mortgages and could, in theory, prompt 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 correction is still unlikely. An improving inflation outlook means market expectations that the Bank of England will raise rates to 6.5% look too pessimistic. The fact that households’ financial position, in aggregate, is much healthier than the last time interest rates rose on a sustained basis will soften the impact of higher borrowing costs, as will measures to help mortgagors, such as facilitating moves to interest-only home loans. Meanwhile, unemployment remains low.
Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “Halifax’s measure of house prices saw little move in June, falling 0.1% month-on-month. In the scheme of things, this was little different from a 0.1% month-on-month rise in Nationwide’s index in the same month. June’s fall did leave prices 2.6% lower than the same month a year earlier. But this largely reflected very strong growth in summer 2022, supported by the temporary stamp duty cut. On the Halifax measure, prices are actually up so far this year, by 1.5%, despite rising interest rates and other financial pressures.
“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 increase and this is feeding into higher mortgage interest rates.
“The rise in swap rates reflects markets' view that the Bank of England will continue to raise rates significantly, with Bank Rate now widely expected to peak at 6.5% early next year. But the EY ITEM Club thinks an improving inflation outlook means the market view is too downbeat and that rates will stabilise after two further rises by the Bank of England. If that prediction is correct, 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. Both factors should insulate mortgagors against the impact of higher borrowing costs, as will increased forbearance on the part of lenders. Meanwhile, 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.”
