Key events

UK house price correction remains modest, says EY ITEM Club

UK house prices continue to display a surprising degree of resilience, says the economic forecasters at the EY ITEM Club, by only dipping 0.1% during June (although -2.6% on an annual basis)

However, they fear that this resilience will likely fade.

Martin Beck, chief economic advisor to the EY ITEM Club, warns that the rise in mortgage rates over the last month, if sustained, will increase the challenges faced by those renegotiating fixed rate mortgages.

It could, in theory, prompt a bigger fall in prices than the 10% peak-to-trough decline in values the EY ITEM Club expects.

Beck says:

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 drop in UK house prices shows that the rise in UK interest rates is having a ‘major ripple effect’ on the housing market, says Victoria Scholar, head of investment at interactive investor.

She says:

Mortgage rates have been increasingly sharply with two-year fixed deals averaging 6.52% according to the latest data from Moneyfacts while five-year deals surpassed 6% for the first time in 2023.

The Bank of England’s desperate attempts to bring sky-high inflation back down towards its 2% target is starting to have a major ripple effect across the housing market, dampening demand for properties and in turn weighing on prices. This is of course the intended effect of monetary tightening, but there’s no shying away from the pain it is causing for those on variable rate mortgages and in terms of the wealth effect for many homeowners who are seeing their prized asset drop in value.

While a drop in house prices will be a welcome development for those looking to get onto the property ladder, the cost of borrowing is still a major deterrent with the era of rock bottom interest rates now nothing more than a nostalgic memory.”

Halifax: Household squeeze will weigh on house prices

It is hard to predict how deep or persistent the downturn in house prices will be, says Kim Kinnaird, director of Halifax Mortgages.

Kinnaird explains:

Consumer price inflation is likely to come down in the near term as energy and food prices look set to reverse their steep rises, but core inflation is clearly proving stickier than originally expected.

With markets now forecasting a peak in Bank Rate of over 6%, the likelihood is that mortgage rates will remain higher for longer, and the squeeze on household finances will continue to put downward pressure on house prices over the coming year.”

Today’s report from Halifax is unlikely to be the last national house price index to fall into negative territory this year, warns Tom Bill, head of UK residential research at Knight Frank.

But Bill also predicts we won’t see a house price crash, saying:

Mortgage rates will keep edging up as wage growth keeps core inflation stubbornly high and we expect prices to fall by around 5% this year.

However, this isn’t the global financial crisis part two for house prices and any decline will be kept in check by rising wages, low unemployment, cash sales, record-high levels of housing equity, longer mortgages and savings amassed during the pandemic. The UK housing market is coming back down to earth after a strong three years, not falling off a cliff.”

This also isn’t the first report to show a fall in house prices. Last week, Nationwide reported that annual prices fell at the fastest rate since 2009.

The regional picture: Prices fall fastest in southern England

The South of England remains the area where house prices are facing the most downward pressure, as higher interest rates hit the market.

At -3.0%, the annual fall in the South East was the largest since July 2011, knocking the average price down to £384,106.

In London, prices fell by 2.6% – matching the national average fall – but the biggest drop recorded since October 2009. This pulled the average price of property sold in the capital to £533,057, a drop of around £15,000 over the last year.

Welsh house prices fell by 1.8%, the first annual fall in the principality sine 2013, while they were only slightly lower in Scotland (-0.1%, the first annual drop in three years).

Average house prices are now falling on an annual basis in most parts of the UK.

But the West Midlands (+1.5%), Yorkshire & Humberside (+0.2%) and Northern Ireland (+0.2%) bucked the trend.

The average price of new build property prices rose by 1.9% in the year to June – stronger than the wider market, but the slowest rate in over three years.

Existing properties, Halifax says “were instrumental in driving prices up during the pandemic related housing rush”, were down by -3.5% year-on-year in June. That was the steepest decline since August 2009.

Here are the key points from Halifax’s new house price report, just released.

• Average house price fell by -0.1% in June, a third consecutive monthly decline

• Annual rate of house price growth fell to -2.6%, from -1.1% in May

• Typical UK property now costs £285,932 (vs peak of £293,992 last August)

• New build prices more resilient compared to existing homes

• Southern England sees most downward pressure on property prices

Introduction: Halifax reports fall in UK house prices

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

UK house prices fell at the fastest annual pace since June 2011 last month, Halifax reports this morning, as interest rate rises cool the market.

The latest healthcheck on the UK housing market found that the average price of a home sold in June fell by 2.6% year-on-year, the largest drop in 12 years on Halifax’s index.

That follows a 1.1% fall in the year to May.

On a monthly basis, prices dipped by 0.1%, taking the average price to £285,932.

Kim Kinnaird, director at Halifax Mortgages, says:

With very little movement in house prices over recent months, this rate of decline largely reflects the impact of historically high house prices last summer – annual growth peaked at +12.5% in June 2022 – supported by the temporary Stamp Duty cut.

Despite June’s dip, average house prices are actually up by +1.5% (or £4,000) so far this year. Most of that growth came in the first quarter of 2023, following the sharp fall in prices we saw at the end of last year in the aftermath of the mini-budget.

However, Kinnaird warns that the housing market remains sensitive to volatility in borrowing costs, adding:

Concerns about persistent inflation have led to a significant increase in the cost of funding. Coupled with base rate rising by another 50bp, this contributed to a big jump in typical mortgage rates over the last month.

“The resulting squeeze on affordability will inevitably act as a brake on demand, as buyers consider what they can realistically afford to offer. While there’s always a lag effect when rates go up, many existing mortgage holders with variable deals or rolling off fixed rates will likely face an increase in the next year.

Yesterday, financial data provider Moneyfacts reported that the average two-year fixed rate mortgage rose again to 6.52%, the highest since last October.

Reaction to follow….

Also coming up today

Financial markets are on edge after a sharp selloff in shares and bonds yesterday. It knocked the UK’s FTSE 100 down by 2.2% to its lowest closing level since last November, while government borrowing costs soared to a 15-year high.

The rout was triggered by fresh fears of higher interest rates, after US companies added many more jobs than expected last month, around 497,000.

Asia-Pacific stock have joined the selloff today, with Japan’s Nikkei down 0.5%.

Today we get the official US jobs report. which was expected to show an increase of 225k jobs, down from May’s 339K.

A strong jobs report could cause more market jitters, as good economic news will spur central banks to keep tightening policy.

The agenda

• 7am BST: Halifax house price index for June

• 7am BST: German industrial production for May

• 9.30am BST: An overview of UK productivity in January to March 2023

• 1.30pm BST: US non-farm payroll jobs report for June

• 3.30pm BST: Bank of England interest rate-setter Catherine Mann speaks in a panel discussion in New York