Outlook for UK housing market remains difficult

As falling prices weigh on consumer confidence, the chances of the Bank of England engineering a 'soft-landing' look ever more difficult

By Stuart Cole | @Stuart Cole | 1 August 2023


Today’s UK house price data from the Nationwide showed prices falling again, by -3.8% annually, as the higher costs of mortgages continues to dampen demand and see property prices becoming increasingly unaffordable. On a seasonally adjusted monthly basis, Nationwide’s measure of house prices fell by -0.2% in July, more than reversing the modest 0.1% increase seen in June, and meaning prices have fallen in nine months over the past year. On an annual basis, prices have now fallen for six months in a row, and the pace of decline is quickening, up from -1.1% in February. The interest rate rises that have been delivered by the Bank of England (BoE) – 13 hikes since end 2021 – are clearly hampering the ability of consumers to pay for properties, with prices overall now down some -4.5% since the peak seen last August.

However, within this downbeat picture is the relative bright spot that house prices have so far avoided the calamitous falls that were being predicted late last year, when the Nationwide suggested a 30% decline could be seen under a worse-case scenario. And prices still remain around 20% above the levels seen at end 2019. But further declines in prices look certain going forward. Data from the Royal Institute of Chartered Surveyors shows that the net balance of surveyors expecting prices to rise over the next three months fell to -45 in June, its lowest level since last October, and a further fall from the -20-reading reported in May. The number of housing transactions is also slowing, with just 80k house purchases completed in June, some 15% below the levels seen at this time last year and around 10% below pre-pandemic averages. This slowdown very much highlights the more cautious approach buyers are now taking before deciding to commit to a property purchase and the financing costs it entails, and with the Bank of England expected to raise rates further, transactions are almost certain to continue to slow, adding further downwards pressure on prices.

At current mortgage rates, a typical two-earner household buying an average property would be required to commit to monthly repayments worth approximately 29% of their disposables incomes, a large rise from the average of 20% seen in the 2010s. Looking at this elevated cost another way, a similar household earning the average wage and looking to buy a standard first-time buyer property with a 20% deposit, will now see monthly mortgage payments consume around 43% of their take home pay at a mortgage rate of 6%, up from 32% just one year ago.

Given the penchant for home ownership in the UK, this level of unaffordability plus increasingly entrenched expectations that prices will continue to fall, will do nothing to boost consumer confidence, which is already significantly below its long run average level. With domestic consumption worth around 60% of UK GDP, the government will be hoping that this increasing sense of pessimism does not curtail spending in general. For the BoE, it makes the chances of engineering a soft-landing ever more difficult.