UK home price slump has further to run despite indications of stabilisation
THE slide in UK house prices has further to run despite some indications of stabilisation, according to Bloomberg Economics.
Property values will continue a “slow grind lower” as the full force of the Bank of England’s 14 consecutive rate hikes continues to filter through to the economy, European Economist Niraj Shah said in a note on Thursday (Nov 9).
Data from mortgage lenders Halifax and Nationwide Building Society both showed house prices edging up in October amid a lack of places for sale. It suggests that property will escape the crash that had appeared possible when mortgage rates started to soar. However, Shah maintains his view that prices will drop around 10 per cent from their peak last year.
“More expensive mortgage costs will remain a significant headwind for house prices as households ultimately will have less buying power,” said Shah. “Home values would probably be under more pressure were it not for supply remaining limited as historically low unemployment prevents forced sales.”
Resilience in the housing market may prove a double-edged sword for Prime Minister Rishi Sunak as he prepares for a general election expected next year. While older, more traditional Conservative voters tend to own property – and will be reluctant to see its value fall – Sunak also needs to appeal to a younger electorate, many of whom have been priced off the housing ladder.
In a direct appeal to those voters, Labour opposition leader Keir Starmer has vowed to boost house-building on the so-called “grey belt” – areas of disused wasteland on the green belt.
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So far, house prices are around halfway through the peak-to-trough decline expected by Shah, who says the market is facing a “slow puncture” rather than a dramatic correction. According to a Bloomberg Economics model linking values to incomes and interest rates, Britain’s housing market is overvalued. “The model suggests there is now a 16 per cent gap between the price of a house in the UK and what fundamentals can justify in July,” Shah said.
Shah noted that BOE data shows interest rates on mortgages are more than triple their level in early 2022, which will “lower purchasing power and limit buyers’ offers.” Many existing homeowners will feel this pain in 2024, when UK Finance says 1.6 million fixed-term deals are due to expire.
Shah expects a steeper decline in prices towards the end of 2023, with relief not expected to come until the BOE starts cutting rates. This will come in the third quarter of 2024, according to Bloomberg Economics.
Risks remained in either way, Shah added: “A resilient labour market and a limited supply of properties up for sale may put a floor under house prices.” BLOOMBERG
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