UK housing market gloom is overdone again

Marcus Ashworth

UK HOUSE prices were widely expected to fall heavily last year, courtesy of a two-year, 14-step interest-rate hiking cycle from the Bank of England. The pessimism turned out to be overdone – and this year looks likely to repeat the performance, with the housing market proving more resilient than predicted by most forecasters.

House values fell a modest 1.8 per cent in 2023, according to the most widely recognised average price measure, from the lender Nationwide Building Society. The Halifax house index, provided by a unit of Lloyds Banking Group, calculates that prices rose 1.7 per cent.

Home prices are down by around 4.5 per cent from their September 2022 peak, but this follows a 25 per cent boom during the pandemic, when fiscal stimulus propelled the market.

Is this a crisis delayed or averted? It’s more likely to be the latter in my view, with prices set to recover modestly. I was somewhat lonely last year in expecting only a small correction, so it’s nice to have some company with Pantheon Macroeconomics also expecting a gentle rise in 2024. 

It takes a lot to dent the UK’s fascination with homeownership. An endemic lack of supply, with building hampered by a Byzantine planning system, helps to keep prices high.

With consumer price increases slowing to a 3.9 per cent annual pace in November, and expected to fall below the BOE’s 2 per cent target by this spring, there’s a reasonable chance that property valuations could rise in real terms as well as nominally.

Nationwide’s chief economist Robert Gardner told me that he expects no real change in overall house prices this year but stressed this may be too pessimistic if the central bank starts cutting interest rates. Bloomberg’s senior UK economist Dan Hanson expects the first BOE cut to come in May, with the Bank rate falling to 4 per cent by November.

Mortgage lenders are jumping the gun with a swath of mortgage-rate reductions. HSBC has cut its five-year fixed rate offer (for borrowers with a loan-to-value of 60 per cent or less) to under 4 per cent, with its best two-year deal below 4.5 per cent.

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These are significantly below the BOE’s current official rate of 5.25 per cent; mortgage pricing tends to track the benchmark swap rates that lenders use to hedge their exposure, and these have been falling steadily.

Nearly three-quarters of the UK mortgage market is controlled by the top six lenders. Peter Tsouroulla, head of mortgages at financial advisory firm Trinity Lifetime Partners, says major lenders are keen to  lock in relatively high rates and maintain market share.  Rachel Springall of Moneyfacts Group notes that the number of different mortgages has risen to its highest in more than 15 years, with nearly 6,000 different products available for borrowers.

There are other potential tailwinds for house prices in what is an election year, with Chancellor of the Exchequer Jeremy Hunt expected to reduce income taxes in his March 6 budget. And there’s unlikely to be any progress in building more homes, even though both the Conservative and Labour parties have pledged to construct 1.5 million properties over the next five-year parliament.

Demand, meantime, will be fuelled by wages growing by more than 7 per cent, almost double the inflation rate. While more than 1 million homeowners face substantially higher mortgage costs this year as they refinance existing two-year fixed-rate loans, the size of the increase has fallen in recent months.

The housing market has been sluggish for some time, but November mortgage approvals rose to more than 50,000, a 26 per cent increase from January 2023‘s low point.

Overall mortgage activity remains about 20 per cent lower than before the pandemic, but that’s offset by a shift toward cash-only deals, which now comprise nearly two out of every five transactions, according to Nationwide.

The Bank of Mum and Dad has been busy, particularly in the wealthier southeast of the country. Moreover, online property portal Rightmove reported a surge of both new listings and buying searches over the holiday period.

Affordability has been squeezed by the surge in interest rates, with the typical mortgage payment rising to 38 per cent of average take-home pay, well above the long-term average of 30 per cent. Nationwide’s Gardner sees this easing as mortgage costs fall back. The house price-to-earnings ratio is currently six times the average salary, down from a peak of seven times in 2022. Nonetheless, it remains an eye-watering distance above the 4.5 times long-term average. Home prices aren’t going to suddenly roar upward, as interest-rate reductions tend to have slower and smaller impact than increases.

The Resolution Foundation think tank estimates UK households have gained a net £16 billion (S$27.1 billion) as higher savings rates more than offset increased debt costs, largely because most mortgages are on fixed terms. This equates to an “unprecedented windfall” worth three-fifths of all household income growth over the past two years, the research firm estimates, and adds to about £200 billion of excess savings accumulated during the pandemic. 

The threat of mild recession still hangs over the UK, after growth flatlined for most of the last two years. So it’s encouraging that the December services purchasing manager’s index rose to 53.4, beating expectations and exceeding the 50 expansion line. The services sector contributes 80 per cent of the British economy.

Deutsche Bank’s UK economist Sanjay Raja last week gave eight reasons to be reasonably optimistic about the economic outlook – inflation falling faster, lower energy bills, (nominal) tax cuts, sustained real wage growth, prospective rate cuts, an improved government borrowing scenario, no recession and the possibility of a spring recovery in house prices. While individually marginal, the cumulative effect could help revive consumer confidence. 

To that list, I would add a potential boost in sentiment once the election is out of the way, as households and businesses can plan with more certainty. So the gloom about the UK housing market looks overdone to me – although none of this solves the issue of how to get more households onto the housing ladder in the first place. That’s a much longer-term problem. BLOOMBERG

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was chief markets strategist for Haitong Securities in London.