Where next for house prices?

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by Shaun Richards

The ebb and flow of economic events gives us the opportunity to update ourselves on the central bankers favourite topic. We will probably never know how much fears about house price falls influenced the way they dithered, dillyed and dallied before raising interest-rates. But we do know that for them the only way is up. So let us look at this morning’s news.

The February 2023 RICS UK Residential Survey continues the trend of being generally downbeat, however there are several indicators demonstrating a more stable picture emerging through the course of 2023.

That is interesting and against other trends so let us look further.

This reassuring prospect is also evident in some of the anecdotal remarks from survey participants stating how a more optimistic February has given the housing market some hope for the coming months after a sluggish start to the year.

Ah so rather than actual numbers they are relying on anecdotes. The actual numbers are below.

Most significantly, the headline reading for new buyer enquiries rebounded to a net balance of -29% (measured on a seasonally adjusted basis), improving from -45% in January. While this metric is still signalling a decline in demand, and represents the tenth consecutive negative monthly reading for new buyer enquiries, it is also the least negative result since July 2022.

So their actual readings are merely less bad rather than showing any real improvement.Maybe their anecdotes and sentiment comes from this from the Halifax on Tuesday..

“The average house price in February was £285,476, 2.1% up on this time last year, and has been stable over
the last three months. ”
“When comparing to January, there was a 1.1% increase in house prices through the month of February,
although overall prices are flat compared to three months ago.”

I can imagine the research student due to give the morning meeting kissing the screen which told them this. They would be already imagining the beaming smile of Governor Andrew Bailey as they tell him the news. “All due to your masterful intervention last autumn Governor……” and anticipate no problems with their next contract renewal. Indeed promotion may even be on its way.

Actually there is more our research student can use from the Halifax report.

“In cash terms, house prices are down around £8,500 (-2.9%) on the August 2022 peak but remain almost
£9,000 above the average prices seen at the start of 2022 and are still above pre-pandemic levels, meaning
most sellers will retain price gains made during the pandemic.”

Governor Andrew Bailey will be thinking of the “Wealth Effects” from this.

But tucked away in the report was a problem.

Recent reductions in mortgage rates, improving
consumer confidence, and a continuing resilience in the labour market are arguably helping to stabilise prices
following the falls seen in November and December.

We noted the falling mortgage rates as I recall looking at UK five-year mortgage offers falling below 4% but since then we have been seeing bond yields rise. Only yesterday we were looking at a US ten-year yield approaching 4% and whilst that is not a direct influence on UK mortgage rates it is pulling up our bond yields too.

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Mortgage Rates

As we looked at on the first of this month the Bank of England was recording higher mortgage rates in January.

The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 21 basis points from 3.67% to 3.88% in January. The rate on the outstanding stock of mortgages increased by 4 basis points, to 2.54%.

As I have pointed out above we have recently seen bond yields rally which will be feeding into future mortgage rates. After the last Bank of England policy annoucement the five-year yield went below 3% and briefly below 2.9% as markets adjusted to the Bank of England hinting at a Canadian style pause in interest-rate rises.Indeed only last week it had another go at this.

The Bank of England governor, Andrew Bailey, has signalled interest rates may have peaked after 10 successive increases in the official cost of borrowing since December 2021.

Speaking in London, Bailey said Threadneedle Street would assess the impact of tighter policy on the economy before sanctioning any fresh moves. ( The Guardian)

But now it is in a situation where Federal Reserve rhetoric us putting pressure on the UK Pound £ meaning another rise this month looks necessary to defend it. The five-year yield has accordingly risen to 3.74%. So we are looking at around 0.75% of increases being on their way. As you can see from the latest release from Moneyfacts on the 3rd of this month it is not impacting yet.

Moneyfacts has revealed that the average rate for a two-year fix remained at 5.33% this week.

The average 10-year fix gained six basis points from 4.97% to 5.03%.

The average three-year fix gained three basis points, moving to 5.19%, and the average five-year fix fell by two basis points to come to 4.98%.


The Office for National Statistics ( ONS) has been looking at the changes in this area and whilst its numbers are for December they are quite close to present levels.

Mortgage rates differ, depending on the size of the loan relative to the value of the property being purchased. This is known as the loan-to-value ratio. The average mortgage rate offered by lenders for a five-year fixed rate loan at a 75% loan-to-value ratio was 5.05% in December 2022, according to the Bank of England.

If we use that then we get this.

This would have resulted in a monthly mortgage repayment of £1,262 if you were purchasing a semi-detached property in the UK at the average December 2022 price of £286,000, with a mortgage term of 25 years. This is a £481 (61%) increase in the monthly repayment compared with the corresponding monthly repayment estimate in December 2021.

As an aside it is revealing to look at what mortgage rates were then with the Bank of England having cut interest-rates to 0.1% and making sure banks were flush with cash via its Term Funding Scheme.

The average equivalent mortgage rate on offer was 1.59% and the average UK semi-detached property price was £258,000 in December 2021.

The ONS also put the changes another way.

In December 2021, a loan-to-value rate of 75% and a budget of £1,000 per month would have enabled you to afford an average semi-detached property in nearly two-thirds of local authorities in Great Britain.

With the same budget in December 2022, however, you would be able to afford the average semi-detached property in less than a third (30.1%) of areas.


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Let me start with the positive which is that the outlook for the UK economy has brightened as 2023 has progressed. That has been added to this morning by leaks/runours about submarine work for the AUKUS deal. But for house prices the latest barrage of central bank rhetoric means that it looks like  more mortgage rate increases are on their way.At present levels some 0.75% of them. The landscape has rather changed with it now looking likely that the Bank of England will raise interest-rates again in a fortnight. Due to currency pressures the size of the move may be decided by US economic data as we have non-farm payrolls tomorrow and consumer inflation next week.

Also higher mortgage rates will impact on the Buy to Let market and I found this interesting on the Property Tribes website.

What happens then? Given most BTL calculations crumble with mortgage rates around 4-5% (currently Ltd co 5Y effective rates are in-excess of 5% once fees factored in), what is going to happen at effective rates of 6-7%+? There will be an abundance of negatively yielding BTLs out there. ( Jtiran)

So that area may soon be singing along with Glenn Frey

The heat is on, on the streetInside your head, on every beatAnd the beat’s so loud, deep insideThe pressure’s high, just to stay alive‘Cause the heat is on

Perhaps it was house prices that Swati Dhingra of the Bank of England was fearful of yesterday.

In my view, a prudent strategy would hold
policy steady amidst growing signs external price pressures are easing, and be prepared to respond to developments in price evolution.

I expect there to be more falls.

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