- The Halifax measure of house prices followed its Nationwide counterpart in showing a small fall in July. A 0.3% month-on-month decline was the fourth successive monthly fall. But with recent declines modest, average values were little changed from six months ago, despite cost of living pressures and rising interest rates.
- The EY ITEM Club thinks there are good reasons for this resilience. Despite talk of intensifying mortgage challenges amid rising interest rates, average mortgage rates have risen only modestly so far, reflecting the predominance of fixed-rate home loans. Household finances in aggregate are unusually strong, cash pay is rising fast, unemployment is low and more borrowers are extending mortgage terms.
- But house prices are likely to continue heading down, albeit more in the form of a slow puncture than a serious correction. Although mortgage rates have started falling from their recent highs, they are likely to remain above where they were just a couple of months ago, particularly following the Bank of England’s decision last week to raise interest rates again. 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: “According to Halifax, average house prices fell 0.3% month-on-month in July, very close to the 0.2% decline indicated by Nationwide. This was the fourth consecutive monthly fall. But with all of those falls modest, house prices are broadly unchanged from six months ago and only 3% down on the peak last August, despite cost of living challenges and a significant rise in interest rates.
“There are some clear reasons for this resilience. For one, the dominance of fixed-rate mortgages is slowing the pace at which higher official interest rates are feeding into higher mortgage costs for the average household. As of June, the average interest rate on a UK mortgage was 2.93%, up from 2.12% 12 months earlier. In comparison, over the same period, the Bank of England policy rate saw a far larger increase from 1.25% to 5%.
“Meanwhile, 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. And according to recent financial results from some home builders, the share of borrowers extending mortgage terms has risen substantially. These factors should support demand and reduce the extent of forced selling, limiting how much further house prices fall.
“However, these sources of support will only go so far. Although mortgage rates have started falling from their recent highs, they are still well above where they were just a couple of months ago. And following the Bank of England’s decision to raise interest rates again last week, scope for the cost of home loans to fall further will be squeezed.
“On balance the EY ITEM Club still thinks house prices will continue to fall over the rest of this year and into 2024. But the decline will be more of a slow puncture than a serious correction, with values ultimately declining by around 10% peak-to-trough.”
