Economic headwinds set to strengthen, it predicts
The housing market remained “remarkably resilient” for the first three quarters of the year, but it would be difficult for the market to regain momentum with economic headwinds set to strengthen, the Nationwide Building Society stated as it released its year-ending house price review and forecast.
“For much of the year, activity levels remained at or above pre-COVID levels with annual house price growth in double digits, ranging from 10% to 14.3% in the first eight months of the year, despite intense pressure on household finances from surging inflation and a steady rise in mortgage interest rates,” Robert Gardner (pictured), chief economist at Nationwide Building Society, said.
Between January and August, the average UK house price increased by almost £20,000, from £255,556 to £273,751, Nationwide reported.
“This performance was all the more surprising since housing affordability was already stretched in a number of important respects,” Gardner said. “But the financial market turbulence which followed the mini budget at the end of September represented a major shock to the housing market.
“The number of mortgage applications slumped towards the lows seen at the start of the pandemic as a spike in long-term interest rates quickly fed through to mortgage rates and fundamentally changed the affordability dynamic for prospective buyers.”
Though financial market conditions have now settled with long-term interest rates returning to the levels prevailing before the mini budget, the economist pointed out that mortgage rates are taking longer to normalise. Activity levels in the housing market have also shown few signs of recovery and house prices have seen three successive monthly declines since September – the worst run since 2008.
“The recent weakness may, in part, reflect an early start to the usual seasonal slowdown, with potential buyers opting to wait until the new year to see how mortgage rates evolve before looking to transact,” Gardner explained.
“But it will be hard for the market to regain much momentum with economic headwinds set to strengthen, as real earnings fall further, the Bank of England moves interest rates higher, and with the labour market widely projected to weaken as the economy shrinks.
“The risks are skewed to the downside, but there is still a good chance that we can achieve a relatively soft landing next year, with activity stabilising modestly below pre-pandemic levels and house prices edging lower, perhaps by around 5%.”
Gardner expects the Bank of England to raise interest rates a little further, although, in recent years, most borrowers have opted for fixed rate mortgages, which are linked to longer term interest rates that may have already peaked.
He added that while the labour market is expected to soften, most expect the deterioration to be modest.
“Many forecasters, including us, expect the unemployment rate to rise to around 5% in the years ahead – this would represent a significant rise from the current rate of 3.7%, but would still be low by historic standards,” Gardner stated.
“Moreover, household balance sheets remain in good shape with significant protection from higher borrowing costs, at least for a period, with around 85% of mortgage balances on fixed interest rates.”
